With Chinese stocks such as Alibaba, Tencent and Baidu – the so-called BATs – driving emerging market performance last year, investors have been searching for the next wave of technology companies that could lead markets upwards.
Dale Nicholls, manager of the £1.4bn Fidelity China Special Situations investment trust, has invested around 4 per cent of the portfolio in unlisted companies hoping to capture some of the future Chinese giants.
The trust was an early investor in Alibaba – the internet conglomerate founded by Jack Ma in 1999 – before it listed in 2014 and raised a then-record $231bn.
Indeed, under previous manager Anthony Bolton the firm made a £15.3m investment in 2012, which later doubled in value.
The Chinese internet giant is still one of the trust’s largest positions representing 10.3 per cent of the portfolio, albeit an underweight position in comparison to the MSCI China index, where it accounts for 13 per cent of the benchmark.
Performance of stock over 5yrs
Source: Bloomberg
Nicholls said: “Alibaba is the leader in e-commerce but really extending strongly into other areas: it’s also the leader in cloud in China and it’s also pretty exciting about what is happening in the financial side of the business.”
He said the firm has made great progress on the e-payments side of its business, AliPay, and with the amount of data it has at its disposal.
“The best comparison is with Amazon, in that it’s e-commerce but the model is different, they’re effectively a platform,” said Nicholls, who has previously spoke of his desire to “uncover the Alibabas of tomorrow”.
To take advantage of further unlisted opportunities in the Chinese market, investors agreed to increase the limit on unlisted exposure within the portfolio from 5 per cent to 10 per cent in 2016.
Currently, the trust’s unlisted holdings have a fair value of around £52m, according to the firm’s half-year report published in November.
“There is a lot happening in that unlisted space so it’s good to be able to access those opportunities earlier,” said the manager.
Below, Nicholls highlights the four unlisted companies in the Fidelity China Special Situations trust and explains why they have the potential to grow.
The first unlisted Chinese company being backed by Nicholls in the Fidelity China Special Situations trust is Shanghai Yiguo, a fresh food e-commerce platform launched in 2005.
“Yiguo is the online leader in grocery in China,” he explained. “They’re aligned heavily with Alibaba. They are operating their own sites but are also operating a lot of the online groceries for Alibaba as well.”
He added this is “an underpenetrated area”, which is showing good growth potential. 
Another of the manager’s unlisted holdings is Meituan, a group-buying website similar to Groupon that has also branched out into new areas.
“Meituan is in many ways an e-commerce for services things like online food delivery, restaurant bookings, hotel bookings and that sort of thing,” said Nicholls. “It is a key leader in that space and also generating very strong returns.”
One of the most recent addition in the portfolio, which Nicholls said he has added to recently is Jiguang, a mobile data services company, which he a during the second quarter of 2017.
Nicholls (pictured) said: “Jiguang has built a strong business working with app developers. They help initially a lot with the push marketing helping to market their apps and in return they’ve been able to embed software into those apps and are able to use that data.
“They’ve got data on over 600 million mobile phones in China, which is very valuable to a range of customers particularly in areas like consumer finance.”
The Fidelity China Special Situations manager added: “When you’re looking into real-time data about which app is doing well in China is very valuable data.”
Finally, Nicholls highlighted Didi Chuxing, a longer-term holding in the portfolio that was valued at £21.5m in the Fidelity China Special Situations trust’s most recent half-yearly report.
“[It’s] the key leader in ride-sharing in China, it’s generating more rides per day than Uber globally,” he said. “It’s an extremely big business and still growing strongly.
“They’re investing heavily in areas like driverless cars and autonomous driving but the core business remains quite strong.”
Indeed, the firm completed more than 7 billion rides during 2017 and has set its sights on becoming a global leader in smart transportation and automotive technology by 2022.
Didi has received strong backing from international investors such as Japanese firm Softbank – which is now one of the company’s largest shareholders – and most recently raised more than $4bn in December to support its investment in artificial intelligence capacity, expansion into international markets and the development of new energy vehicles.
However, Nicholls is keen to note that the unlisted holdings are longer term investments and are unlike to list on the stock market this year.
“I think probably Jiguang will be first but if you look across all the holdings you won’t see much this year,” he explained. “I think the majority will come next year. In some ways they’ve maybe been too successful in fundraising. There’s not that pressure to list.”
The manager said: “Companies in general globally are coming to market later. A lot of companies have that freedom to come to market later and list as bigger companies to get the best valuation they can.
“In China there’s a much healthier ecosystem of private equity and venture capital and I think that is a bigger factor in why companies have come [to market] later.”
The Fidelity China Special Situations trust was launched in 2010, focused on the long-term growth potential of the Chinese economy under veteran investor Anthony Bolton.
Nicholls took over the trust from Bolton in 2014 and also manages the $3bn, four FE Crown-rated Fidelity Pacific fund, an FCA-recognised offshore fund investing in the Asia-Pacific region.
Performance of the trust vs sector & benchmark under manager
Source: FE Analytics
As the above chart shows, the trust has generated a total return of 146.43 per cent since Nicholls took over in January 2014, compared with a 135.47 per cent gain for the average IT Country Specialists: Asia Specific sector and a return of 102.08 per cent for the MSCI China index.
Fidelity China Special Situations has ongoing charges of 1.16 per cent and is trading at a 12.1 per cent discount to net asset value, according to the Association of Investment Companies. Nicholls said he had recently reduced gearing in the trust to around 16 per cent.