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Fund perspective FIDELITY FUNDS - CHINA CONSUMER FUND Tapping into China’s evolving consumer story M AY 2 0 11 Please note: • This fund invests primarily in China or Hong Kong equities. • This fund may be subject to the risks of investing in emerging markets, in single or in a limited number of market(s) or sector(s). • Investors may suffer substantial loss of their investments in the fund. • The investment decision is yours. Before you decide to invest, you should make sure the intermediary has explained to you that the fund is suitable to you. • Investor should not invest in the fund solely based on the information provided in this document and should read the prospectus (including potential risks involved) for details. FIGURE 1: CHINA’S CONSUMPTION AT AN INFLECTION POINT: HISTORICAL PRECEDENTS Consumption / GDP (%) Consumption / GDP (%) 90 85 80 90 85 80 China (T=2007) Korea (T=1988) Japan (T=1869) 75 75 70 65 70 65 60 55 60 Consumption / GDP (%, 3yr MA) ? 55 T+40 T+35 T+30 T+25 Time Frame Source: Morgan Stanley Research, November 2010 T+20 50 45 T+15 50 45 T+10 B. Law, Fudan University, Shanghai, China Furthermore, the 1.3-billion-population will prolong the duration of the consumption boom which is moving from the richer coastal areas towards Central and Western China. As production bases have shifted from coastal to Central and Western China, income level in rural China has increased and its growth is expected to continue. Under-penetrated sectors like luxury goods, brand names, insurance, education, health care and tourism are likely to benefit over the coming decade as disposable income grows and living standard rises. T+5 Education M. Law, Fudan University, Shanghai, China Key growth drivers that support this secular transformation among Chinese consumers include: government pro-consumption policies, rising personal income, under-penetration of consumer goods and services, consumption upgrade and urbanization. T Total investment experience: 11 years Underpinned by China’s huge population and robust domestic demand, Raymond expects China’s consumption to witness an annual growth of 15-20% over the next decade. By focusing on China’s consumption story, investors should be able to enjoy significant growth potential in the medium to long term. T-5 1999 – 2000 Teacher / Researcher Fudan University, Shanghai, China Raymond finds that the Chinese economy is at an inflection point similar to Japan in 1969 and Korea in 1988. History suggests that beyond this inflection point, the consumption intensity of the economy (represented by the consumption-gross domestic product ratio) starts to rise significantly (Figure 1) bringing China to enter a golden age of consumption. T-10 2000 – 2006 Assistant Director, Consumer Team Leader BNP Paribas Peregrine, Shanghai, China WHAT ARE THE KEY FACTORS SUPPORTING CHINA’S GOLDEN AGE OF CONSUMPTION? T-15 2006 – 2009 Investment Analyst (Consumer / Telecom / Banks / Insurance) Fidelity International, Hong Kong T-20 Experience 2009 – Present Director of Research / Consumer Sector Team Leader Fidelity International, Hong Kong Raymond Ma, the portfolio manager of the recently-launched Fidelity Funds - China Consumer Fund, believes that China is about to enter a golden age of consumption. Several key drivers are supporting the strong consumption growth and the changing consumption patterns of Chinese consumers. This offers investors a gateway to a wealth of enduring growth opportunities in the low-growth world which characterises the current global landscape. T-25 Portfolio Manager T-30 Raymond Ma Fund perspective HOW DOES THIS FUND RIDE ON THE CONSUMPTION TREND AND HOW IS IT DIFFERENT FROM OTHER CHINA FUNDS? The Fund invests primarily in Chinese and Hong Kong companies that are involved in the development, manufacture or sales of goods or services to consumers in China. The key benefits of playing the consumption story via domestic companies versus the global brands are two-folds: 1) China is a market of 1.3 billion people, and the local companies have the local knowledge so they will likely win in the long-term; and 2) global brands only have a few percentage of the exposure to China, so it is very hard to trigger a re-rating story there. Other key characteristics of the fund include: • Benefit from the consumption story – Relative to other Chinese equity funds, the Fidelity Funds - China Consumer Fund takes a more direct and focused approach to participate in China’s evolving consumer story with relatively higher exposures to the consumer discretionary and consumer staples sectors. • Capture both cyclical and secular growth trends – While consumer discretionary and consumer staples are the sectors that Raymond will consider primarily, he has the freedom to invest into broader consumer themes across sectors that benefit from China’s emerging middle class and rising consumerism, such as telecoms and insurance. Raymond believes Chinese consumers will play an important role in the expansion of the telecom sector, where penetration is still very low at the moment. Undoubtedly, penetration rates will rise as the field of mobile data is growing particularly strongly. He also looks at the insurance sector as its penetration is also currently very low in China, which represents a real growth opportunity. • Encompass the opportunities in Greater China – Raymond believes not only Chinese companies will benefit from this secular growth theme but companies in Hong Kong and Taiwan also benefit from the structural shift in consumption upgrade. As an example, the influx of mainland Chinese shoppers and their preference for high-end luxury products have been key drivers of the Hong Kong retail market. Moreover, Taiwan’s travel and tourism sector is benefiting from the influx of Chinese tourists to visit Taiwan (due to further deregulation and more direct flights). The “C.A.S.E” investment approach • Communication – builds conviction through belief in management • Analysis – believes fundamental research can add value and avoid pitfalls • Structure – likes to have this in place to build best balance between risk and return • Expectations – aims to outperform the MSCI China Index over a 3- to 5-year period THERE ARE OVER 5,000 CHINA-RELATED STOCKS, HOW DOES THE FUND MANAGER MAKE INVESTMENT DECISIONS? Investment ideas come from 4 particular sources (see Figure 2), and are then narrowed down to a pool of 400-600 relevant consumer stocks. Raymond believes that the strength of the fund is the detailed analysis of the available opportunities by himself and by the team of Fidelity research analysts. In particular, he benefits from the 1,000 research notes produced by the analysts every year. Through the “C.A.S.E” investment approach, the portfolio manager selects the best 80 to 120 stock opportunities for including in the fund. FIGURE 2: SUMMARY OF INVESTMENT PROCESS Ideas come from 4 sources 1. Fidelity Analysts 1000 Research Notes 2. Over 300 company meetings a year 3. External sources provide ideas for IPOs 4. Ideas gained from companies on suppliers or competitors C.A.S.E Communication, Analysis, Structure, Expectations Great Companies Growing Companies Companies with inherent potential 70%-80% of the portfolio these are broadly a consensus view with market Companies with attractive valuations Special Situations 20%-30% of the portfolio these are broadly non-consensus positions Companies are viewed in 5 particular ways Fund perspective WHAT IS THE IMPACT OF INFLATION ON CONSUMER STOCKS? In line with the expectations of Raymond, China’s inflation, Producer’s Price Index (“PPI”) in particular, has been gradually slowing down as the monetary tightening filters through. Meanwhile, consumption remains resilient. China’s CPI (“Consumer Price Index) rose 5.3% year-on-year in April, down from the 32-month high of 5.4% in March. CPI rose 0.1% month-on-month in April, with food prices down 0.4% (vegetable prices down by 11.2% month-on-month in April). Non-food prices went up 0.4% month-on-month (2.7% year-on-year). Retail sales growth remained buoyant at 17.1% year-on-year in April. While China’s CPI could reaccelerate over the next 2 months as a result of the lower base effect and the catch-up of non-food inflation, Raymond expects China’s inflation to peak out in 2H11 as the monetary policy normalization continues and the growth of money supply decelerates. In addition, food prices are likely to decline further as the supply of food tends to increase during the summer. Raymond believes that the strong growth in household income should offset the negative impact of the monetary tightening and should continue to support the resilient consumption in China. Chinese consumer stocks have in the past demonstrated strong performance, and resilience during periods of inflation. Chinese consumer stocks1 gained 372% over the past 10 years and outperformed the general China stock market (Figure 3). FIGURE 3: CHINA CONSUMER STOCKS1 OUTPERFORMED THE GENERAL CHINA STOCK MARKET 600 Rebased to 100 8 400 6 300 4 200 2 100 0 0 04-2001 % 500 10 China CPI y-o-y (RHS) MSCI China MSCI China consumer stocks1 -2 04-2003 04-2005 04-2007 04-2009 04-2011 Source: FIL Limited, Bloomberg, as of 30/04/2011, period: 30/04/2001 – 30/04/2011, performance of MSCI China, MSCI China Consumer Staples and MSCI China Consumer Discretionary, price indices in local currency, indexed to 100. China CPI y-o-y refers to China CPI year-on-year growth rate. MSCI China consumer stocks depict MSCI China Consumer Staples and MSCI China Consumer Discretionary index performance, indexed to 100 and then equally weighted. 1 WHERE DO OPPORTUNITIES LIE IN TERMS OF VALUATIONS? Raymond believes that valuations are fair compared to growth. As long as liquidity stays strong, the risk of valuation correction is believed to be limited. Based on Fidelity’s research, Raymond believes that Hong Kong retailers will see further upward re-rating because one-third of sales of Hong Kong retailers are attributed to mainland shoppers, and this trend is expected to continue. CONCLUSION AND OUTLOOK Raymond has conviction that the Chinese consumption story offers investors unique potential and he firmly believes that this burgeoning area will outperform the broader Chinese market over the medium- to long-term. The Fidelity Funds - China Consumer Fund is set to offer an ideal investment vehicle for investors to gain exposure to this huge and developing story. FIL Limited, established in Bermuda, and its subsidiaries are commonly referred to as Fidelity or Fidelity International. Fidelity only gives information about its products and services. Any person considering an investment should seek independent advice on the suitability or otherwise of the particular investment. Investment involves risks. Past performance is not indicative of future performance. Please refer to the Fidelity Prospectus for Hong Kong Investors for further information including the risk factors. In general fluctuation in the performance of emerging markets is normally higher as it tends to be more volatile than other developed markets. If investment returns are not denominated in HKD or USD, US/HK dollar based investors are exposed to exchange rate fluctuations. Fidelity, Fidelity International, and Fidelity International and Pyramid Logo are trademarks of FIL Limited. The material is issued by FIL Investment Management (Hong Kong) Limited and it has not been reviewed by the Securities and Futures Commission (“SFC”).