Baillie Gifford China Growth Trust Annual Report - January 2026

Analysis of the Introduction Chapter

This chapter serves as the opening introduction and positioning section of the full report. Its core message is: the trust invests in Chinese company equities/ADRs and pursues long-term capital growth; it significantly outperformed its benchmark in the fiscal year ended January 31, 2026; and it fully articulates manager Baillie Gifford's growth-equity investment philosophy.

Annual Scorecard

For the fiscal year ended January 31, 2026, both share price total return and NAV total return significantly outperformed the benchmark:

Metric	Return
Share price total return	+38.8%
NAV total return	+34.0%
Benchmark (MSCI China All Shares Index, GBP)	+22.2%

As for the discount, the text discloses it only in chart form: the discount fluctuated in the 5%–20% range, and neither the precise year-end discount level nor the 1/5/3/10-year average discount/premium figures are given in the text.

KPIs and Capital Structure

The board viewed the fiscal year's KPI performance as positive, with NAV outperformance versus the benchmark being the key positive factor and share price performance versus the benchmark also positive. The ongoing charges ratio remained stable at approximately 1%, versus a board target of 1.0% or below; for reference, in 2021 the ratio would have been 1.0% without the management fee waiver, and in 2022 it was 0.8%. The board also evaluates performance against peers and acknowledges that this type of growth portfolio may experience periods of underperformance in the short to medium term — an uncertainty that the original text itself acknowledges.

Investment Philosophy

This section is Baillie Gifford's self-description, and its core arguments are as follows:

• Time horizon: A business's true value is determined by the many years ahead rather than the next few quarters. "The true value of a business is rarely determined by what will happen in the next few quarters, but by what will happen in the many years ahead." In other words, a company's true value is rarely determined by what happens in the next few quarters, but rather by what happens in the many years ahead.
• Portfolio construction: The goal is to build a portfolio of 40–80 "best ideas," seeking opportunities that are mispriced relative to fundamentals and accepting that value realization takes time.
• Stock selection criteria: Seek companies with sustainable competitive advantages and earnings growth that is significantly above market averages over the long term, investing in disruptive trends that last for years.
• ESG positioning: The firm believes ESG factors are embedded at the core of long-term investing and are especially important in China, for reasons including the role of the state, lower disclosure levels, and the need for engagement with companies — both to reduce risk and to uncover opportunities.
• Source of differentiation: Based on fundamental research with a five-year forward view, the active advantage comes from three areas: time horizon, perspective, and insight.

Note: this section is a self-promotional statement of investment philosophy by the manager; readers should be aware that this is a narrative from the position holder's perspective.

Management Background

Baillie Gifford & Co Limited has served as manager and company secretary since September 16, 2020; previously, the trust could invest across the entire Asia-Pacific region rather than China alone, and the comparator index was different. The performance-related CTO period began on November 29, 2024. This chapter does not elaborate on the five- or ten-year long-term record, merely noting that it is disclosed later on pages 26–31.

From Philosophical Narrative to Performance Delivery: Signal Mechanisms and Data Truths in the Chair’s Statement

The textual focus of the continuation shifts noticeably: the first half builds a "soft power" narrative around investment philosophy and capability endowment, while from the `Strategic report` and `Chair’s statement` onward, the text transforms into a highly structured annual review — a typical "from vision to verification" structure in annual report writing. The Chair's statement opens by declaring that the company has a "unique investment strategy," and breaks this uniqueness down into six identifiable elements: China growth style, investment in unlisted companies, prudent gearing, competitive costs, buyback-driven discount management, and a 100% performance-linked Conditional Tender Offer. Notably, each of these six elements corresponds to KPIs or governance mechanisms that can be quantified and tested, indicating that "uniqueness" here is not rhetoric but a set of auditable commitments.

The Time Dimension of the Chair Transition: The New Chair and the Continuation of Historical Underperformance

Nicholas Pink joined the board in 2023 and became Chair in 2024. The timing is noteworthy: the Company's mandate change occurred on September 16, 2020, and Pink's appointment came in the third year after the mandate change. This means he took over a company that had endured the growing pains of a strategic transition and is repairing a long-term performance deficit. While showcasing the strong rebound of the past two years, the Chair's statement also candidly discloses that since the mandate change, NAV TR and share price TR still underperform the benchmark by 6.3% and 9.3%, respectively — this dual-track narrative of "acknowledging historical shortfalls + emphasizing recent improvement" both defends the achievements made during the new Chair's tenure and sets a reasonable long-term expectation anchor for investors.

The KPI System: Signal Structure Across Four Quantifiable Dimensions

The company's choice of four KPIs in itself conveys management's definition of "shareholder value":

KPI	FY2026 data	FY2025 data	Signal meaning
NAV TR vs benchmark	34.0% vs 22.2% (outperformance of 11.8%)	To be verified	Core investment capability is being delivered
Share price TR vs benchmark	38.8% vs 22.2% (outperformance of 16.6%)	To be verified	The market is beginning to recognize NAV performance
Discount	7.4%	10.4%	Discount narrowed by 3 percentage points
OCR	1.06%	1.12%	Cost ratio improved, but mainly attributable to a larger NAV base

The four KPIs correspond respectively to: investment performance, market pricing efficiency, capital structure management, and cost competitiveness. Among these, the narrowing of the discount from 10.4% to 7.4% is the most governance-relevant indicator — the discount narrowing is not the result of a natural market recovery, but the combined product of 2.9% share buybacks, the introduction of the CTO mechanism, and the performance rebound. Buybacks reduced the free float on the supply side, the CTO provided price support on the expectations side, and performance strengthened holding conviction on the fundamental side. The combination of the three produced a discount-repair effect greater than any single measure alone.

The "Mathematical Effect" Rather Than "Cost Effect" of the OCR Decline

The OCR decline from 1.12% to 1.06% could easily be read on the surface as improved operational efficiency, but the Chair clearly identifies its true driver — higher average NAV due to investment gains. This means the absolute change in total expenses was likely negligible, and the decline was entirely the result of "denominator expansion." This transparent attribution disclosure actually strengthens investor trust in the quality of management communication: rather than packaging the improvement as a cost-control achievement, they truthfully laid bare its mathematical nature.

The Deeper Meaning of the CTO Performance Window: Time Alignment with a Five-to-Ten-Year Investment Horizon

The CTO is assessed based on four-year performance (to November 30, 2028), with a start date of November 29, 2024. From that date to January 31, 2026, NAV TR outperformed the benchmark by 12.4%. Three structural details merit elaboration:

First, the four-year assessment window is significantly longer than typical annual or three-year performance-linked mechanisms, which is logically consistent with Baillie Gifford's stated "five to ten years" long-term investment horizon — short-window performance assessments incentivize investment managers to chase short-term volatility, whereas a four-year cycle is closer to the time required for corporate fundamentals to be realized.

Second, the relationship between the CTO and the mandate change forms a timeline: manager change in 2020 → four-year CTO introduced in 2024 → assessment in 2028. This path in effect grants the new management team a proof period of as long as eight years. From an investor's perspective, the CTO's introduction is an institutionalized commitment to restoring confidence against a backdrop of prolonged underperformance; from the management company's perspective, accepting this clause also signals confidence that its strategy will ultimately work.

Third, the 12.4% relative outperformance since the CTO measurement period began happens to coincide with the window in which growth styles warmed after August 2024 — i.e., "when conditions for growth investing in China have been more favourable." The Chair's candid acknowledgment clearly links the performance improvement to the style cycle, avoiding leaving investors with the false expectation that "alpha can be generated in any market environment."

Core Insights from Performance Attribution: Concentration of Contributions from High-Conviction Holdings

The lists of contributors and detractors disclosed in the text provide important information about portfolio characteristics:

Category	Company	Industry/Characteristics
Contributor	ByteDance	Unlisted, TMT
Contributor	Zijin Mining Group	Resources/cyclical growth
Contributor	Pop Mart	Consumer/IP operations
Contributor	Zhongji Innolight	AI compute/optical modules
Detractor	Meituan	Local services/platform
Detractor	DPC Dash	Restaurant chain/consumer
Detractor	Sunny Optical Technology	Optical manufacturing/supply chain

The contributors span highly diverse industries — unlisted technology, mining, designer toys, AI infrastructure — indicating that excess returns did not come from single-sector beta but from cross-industry stock selection. On the other hand, the largest contributor, ByteDance, is also the company's largest unlisted holding, meaning performance has a relatively high sensitivity to valuation changes in a single unlisted company. The Chair specifically mentions "additional information available via ByteDance’s annual buybacks" — an important argument responding to audit concerns about the reliability of unlisted asset valuations: the annual buyback price provides an observable transaction anchor, so Baillie Gifford's valuation does not rely solely on subjective judgment.

The Triple-Verification Framework for Unlisted Investment Valuation

The annual report describes what is in practice a very rigorous valuation cross-verification mechanism:

1. Internal valuation: The valuation process led by Baillie Gifford;

2. External independent input: Pricing reference provided by S&P Global;

3. Market signal anchoring: Secondary market trading prices, peer multiples and revenue data, supplemented by ByteDance's annual buybacks as an additional information source.

The combination of this mechanism preserves the strategic judgment space that long-term investors need for valuing unlisted companies, while providing auditors with a chain of evidence based on external third parties and observable market signals. For an investment trust with unlisted assets in its portfolio, this transparency management is critical infrastructure for maintaining investor trust.

A Structural Reading of Dividend Policy

Income EPS rose from 2.53p to 2.98p (+17.8%), and the board recommends a final dividend of 2.50p, up 14% year-on-year. Comparing the two figures reveals a payout ratio of approximately 84% (2.50/2.98) — indicating that the board deliberately raised the distribution level while retaining some earnings to support future growth. More noteworthy, however, is the policy's floor commitment: "not less than the minimum required for the Company to maintain its investment trust status." This wording constitutes a flexible floor — the board retains the right to cut distributions to the statutory minimum level, yet this year chose to increase them by 14%. This sends three signals: first, the improvement on the income side is considered sustainable; second, management is confident in its capital allocation and does not believe all earnings need to be retained; third, by raising the dividend in parallel with buybacks, the board is simultaneously conveying value-return commitments to shareholder groups with different preferences.

The Rhetorical Strategy of the Lenin Quotation: Cycle Narrative and Timing Judgment

"there are decades when nothing happens; and there are weeks where decades happen" — the function of this quotation is not decorative. It serves three narrative objectives:

First, it explains the rationality of the violent, pulsed rally in Chinese equities in 2025 ("marking a turning point"), implying that the prolonged valuation depression and regulatory risk premium are being replaced by a one-off cognitive repricing.

Second, it embeds the short-term market surge within a framework of long-term structural change — innovative sectors such as EV, e-commerce, advanced manufacturing, and AI trading below historical average valuations, intersecting with a reassessment of US weight risk in global portfolios, forming a superposition of multiple driving forces.

Third, it reserves explanatory space for potential future volatility: if the pulsed rally of "weeks where decades happen" is followed by digestion and consolidation, the quiet period of "decades where nothing happens" is equally part of this historical process. This is a narrative strategy that prepares investors for "intermittent disappointment."

The Mechanism Value of the Strategy Day and Governance Rhythm

The Board reviewed and "reaffirmed" the company's strategy during FY2026. This annual strategy re-confirmation mechanism is easy to overlook, but its governance value lies in providing the board with an institutionalized venue to periodically review portfolio boundaries (unlisted limits, gearing), management tools (buyback, discount management), and ESG approach (manager's approach to ESG research). The Chair included loan facility renewal and marketing in the board's work list, indicating that in a performance rebound cycle, the board regards "maintaining a balance between future growth and liquidity management" and "converting performance improvement into brand recognition" as equally important tasks.

Overall Observation: An Annual Report That Juxtaposes "Relational Capital" and "Verifiable Performance"

Viewing the narrative and data sections of the continuation as a whole, the annual report completes, in its structure, an argumentative loop from the intangible to the tangible: the first half details the differentiated information advantages Baillie Gifford builds through local teams, academic networks, and long-term holding relationships; the second half uses hard data — NAV TR, OCR, discount narrowing, and CTO outperformance — to prove that these relational assets ultimately translate into quantifiable shareholder returns. The two halves are connected through the identity definition of a "patient and supportive shareholder" — long-term relationships are not an end in themselves, but a means to gain early access to high-quality companies and a deep understanding of industry structures, ultimately returning value to shareholders in the form of performance.

For investors, the information content of this Chair's statement lies in the fact that it not only presents data on "how performance was," but also clearly explains "why such performance was possible" — and completes this narrative while acknowledging historical shortfalls, style-cycle dependence, and unlisted valuation uncertainty. This degree of candid disclosure represents a relatively high standard in asset management annual report writing, and is consistent with the differentiated trust asset Baillie Gifford is seeking to build.

I. ByteDance: Strategic Validation from "Unlisted Asset" to "Core Performance Engine"

ByteDance's cumulative appreciation of 158% (in GBP terms) provides a textbook case for understanding the value of closed-end funds investing in unlisted companies. Even more noteworthy is its "value density": as a single private holding accounting for 10.4% of the portfolio, it has become the single largest contributor to the company's overall excess return. This means that for high-quality assets in China's primary market, their growth momentum is sufficient to penetrate the friction of secondary-market discounts and translate directly into shareholder-visible NAV growth.

An important data anchor: as of January 31, 2026, ByteDance had become the world's third-largest private company based on its most recent financing round. According to data from Crunchbase and the Financial Times, this valuation level surpasses the vast majority of listed companies — and the trust's ability to participate with a 10.4% position exposure is attributable to Baillie Gifford's unique private-markets research and investment network. This constitutes a scarce channel for institutional investors to access the growth dividend of China's "unlisted tech giants" through secondary-market vehicles.

II. Unlisted Asset Allocation: Approaching the Threshold but Still with 7.8% Strategic Headroom

Unlisted investments rose from 9.1% to 12.2%, an increase of 3.1 percentage points, approaching the 20% board limit in absolute terms. Working backwards from the limit, approximately 7.8% of total assets remains available for new investment, but new deployment will be significantly constrained by valuation volatility — should ByteDance appreciate again in a future financing round, this buffer will be quickly compressed.

Metric	January 2025	January 2026	Change
Unlisted investment proportion	9.1%	12.2%	+3.1 pct
ByteDance proportion	—	10.4%	—
Headroom to 20% limit	10.9%	7.8%	-3.1 pct

Notably, the addition of RedNote (September 2025) indicates the manager's intention to build a second private-market growth pole beyond ByteDance. RedNote is positioned as a "lifestyle content and e-commerce platform," complementing rather than duplicating ByteDance's short-video/social ecosystem — which to some extent mitigates the risk of over-concentration in a single private target.

III. Holding Firm at Low Levels: The Deeper Meaning of 3.1% Net Gearing

The net gearing ratio edged down from 3.3% to 3.1%, which appears unremarkable but in fact reflects rigorous debt cost-benefit calculus: Baillie Gifford's long-term return forecasts for Chinese equities still exceed the cost of debt, so the positive-carry logic of gearing remains intact; however, management simultaneously constrained the gearing ratio to hedge against the portfolio's high beta and the liquidity friction of unlisted assets.

Metric	January 2025	January 2026	Change
Net gearing ratio	3.3%	3.1%	-0.2 pct
Loan facility	$25m	$25m	Unchanged
Maturity	—	2026-04-11	—

The $25 million loan facility is approaching maturity, and the board judges that renewal faces no material obstacles. However, if US interest rates remain elevated or volatility in Chinese assets intensifies, renewal terms may carry stricter covenants — a financial variable that warrants close monitoring in the second half of the year.

IV. Quantified Results of Discount Management: The "Two-Dimensional Improvement" from 11.3% to 9.6%

The most valuable aspect of the discount repair is not the 1.7-percentage-point decline in the average, but the "significantly reduced volatility" — meaning that the market's pricing logic for the trust has shifted from sentiment-driven to fundamentally anchored. More precisely:

• Repurchased 1.7M shares, representing 2.9% of share capital (excluding treasury shares)
• Average buyback discount of 10.4%
• NAV accretion of 0.3%

The NAV accretion effect of buybacks (0.3%) appears marginal, but given that NAV itself rose 34% during the buyback period, 0.3% is an additional gain during a favorable tailwind. More importantly, executing buybacks while the average discount remained as wide as 10.4% is equivalent to canceling shares at prices below intrinsic value — every buyback creates immediate value for continuing shareholders. Combined with the buyback program initiated in 2024 and the CTO mechanism introduced in November 2024, the discount protection horizon is now explicitly extended to November 2028.

V. Excess Return Decomposition: The 11.8 Percentage Points of 34.0% NAV vs. 22.2% Benchmark

Return dimension	Value	Excess return
NAV total return	34.0%	+11.8 pct
Share price total return	38.8%	+16.6 pct
Benchmark return	22.2%	—

The share price return (38.8%) is notably higher than the NAV return (34.0%), a gap of 4.8 percentage points, indicating that discount narrowing contributed additional capital return to shareholders during the reporting period. This is a typical structure driven by both "fundamental growth" and "discount repair."

VI. Macro Evidence of "Scaling Innovation": The Micro Mapping of Industrial Data

The production data cited in the manager's report has extremely high strategic validation value:

Industry indicator	Growth rate
Overall industrial value added	+5.9%
3D printing equipment	+52.5%
Industrial robots	+28.0%
New energy vehicles	+25.1%

These data points not only reflect China's manufacturing upgrade, but directly map to the earnings sources of portfolio holdings: CATL supplies roughly one-third of global NEV batteries and an equal share of grid-scale energy storage batteries, with its growth logic highly coupled with NEV production growth; over half of global industrial robot installations correspond to the order sustainability and rising automation penetration of advanced manufacturing companies in the portfolio. Demographic pressure and rising costs are forcing Chinese companies to accelerate automation substitution, constituting the macro-level certainty behind "innovation-led growth."

VII. Valuation-Earnings Growth Alignment: The Rationale for a High P/E

The portfolio's valuation (P/E) is above the benchmark, but the manager expects portfolio holdings' earnings growth over the next three years to approach twice the benchmark's rate. This means that from a PEG perspective, the portfolio may not be more expensive than the benchmark. More importantly, the board explicitly states that "concentration of the portfolio in higher-valuation stocks is significantly below historical peak levels" — providing a safety cushion for the high valuation.

The overall valuation of the Chinese equity market has recovered to above its long-term average; after eliminating the historical discount, further upside will more likely be driven by earnings rather than valuation expansion. The four major directions in which the portfolio is positioned — energy transition, e-commerce, advanced manufacturing, and AI — correspond precisely to the areas of greatest global competitiveness within China's structural transformation.

VIII. Risk-Buffer Symmetry: Downside Pressures and Institutional Protections Coexist

A new variable in the risk list is the coexistence of "concentration in AI-related businesses" and "deflationary pressures." AI concentration is a double-edged sword — if the global AI narrative cools, the portfolio would face a deeper drawdown than the benchmark; however, the text also notes that "the portfolio's discount relative to global equities is a psychological comfort," because global passive capital is extremely concentrated in US tech giants, making Chinese AI assets relatively inexpensive.

Downside risk	Buffer mechanism
Deteriorating US-China relations	Discount management extended to November 2028
Portfolio beta higher than benchmark	Net gearing of only 3.1%, providing a thicker downside cushion
AI business concentration	Unlisted assets (12.2%) provide non-secondary-market diversification
China deflationary pressures	Earnings growth (nearly twice the benchmark) supports valuation digestion

Overall, this is an allocation structure that is "offensively capable and defensively sound": private assets contribute excess-return elasticity, low gearing controls drawdown depth, and discount tools provide liquidity protection. The only item requiring continuous tracking is that if the unlisted proportion breaches the 20% cap, the manager would be forced to pause new investment — and ByteDance's valuation changes will be the key variable triggering this constraint.

Analysis of the Continuation: From Data Temperature Differentials to Paradigm Shift

I. The Split Between Nominal and Real: The Key Code to Understanding China's 2025 Economy

The most thought-provoking piece of information in the continuation is hidden in its final sentence: "real growth but weak nominal momentum." This formulation provides a unique prism for understanding China's macro picture — the gap between real growth and nominal growth is far more revealing than any single GDP figure.

Indicator	Data	Signal conveyed
Real GDP growth	+5.0%	Met the official target, consistent with the "around 5%" commitment
Consumer price index (CPI)	Flat (≈0%)	Weak demand side, inflation largely absent
Producer price index (PPI)	-2.6%	Dual squeeze from overcapacity and insufficient demand
Nominal GDP growth	Estimated in the 4.0%–4.3% range	Below real growth, corporate earnings under pressure

What does persistently negative PPI mean? For investors, it is the "invisible killer" of corporate earnings — even as output grows, the revenue side struggles to expand at the same pace. This explains why the earnings recovery of listed companies lags macroeconomic data, and why equity market valuations, despite policy support, are hard pressed to achieve a systematic re-rating. For policymakers, it is a direct portrait of "insufficient effective demand," precisely confirming why the authorities have elevated "consumption" to strategic priority.

II. Farewell to the Real Estate Driver: An Irreversible Paradigm Shift

The real estate data in the continuation carries more historical significance than appears on the surface:

• Real estate development investment: -17.2%
• Commercial housing sales area: -8.7%
• New construction starts area: -20.4%

The magnitude of these declines exceeds most investors' expectations, and the deeper implication is that real estate is no longer in a "cyclical downturn" but undergoing a structural downgrade — from the economy's main engine to a "ballast stone" for maintaining stability. The continuation uses "transition away from a property-led growth model" to describe this process, and the precision of the word deserves careful consideration: transition implies irreversibility, not a temporary setback.

Comparative data reveals the clarity of this shift even more:

Sector	2025 performance	Investment implications
Real estate development investment	-17.2%	The old engine has stalled and is still bottoming out
Equipment and tooling purchases investment	+11.8%	The new engine has started; technological upgrading
Overall fixed investment	-3.8%	Overall contraction; still negative after the old-new offset
Private investment	-6.4%	Confidence recovery will take time

A detail worth pondering: against the backdrop of fixed investment falling 3.8% and private investment falling 6.4%, equipment and technology investment grew against the trend by 11.8%. This means capital is shifting en masse from "land and buildings" to "equipment and technology" — the money has not disappeared, merely changed destinations. This "structural migration within investment" is more predictive of where future productivity will land than the aggregate growth rate.

III. The Iteration of Policy Logic: From Aggressive Stimulus to Precision Care

The continuation's expression of policy orientation is extremely restrained and precise: "we do not expect a large, credit-fuelled stimulus of the kind seen in past cycles". The information content behind this sentence is enormous.

Recalling the 2008 "four trillion" package and the 2015–2016 shantytown monetization, the most potent weapons in China's traditional toolkit for responding to downturns have been the resonance between credit impulses and infrastructure-real estate. In 2025, the authorities' choice to "reject the old path" can be traced through the following logic chain:

1. Diminishing marginal returns: With high property inventories and already elevated household leverage, continued stimulus injection offers low returns and significant side effects;

2. Structural transformation needs: The decision-making layer has concluded that AI, high-end manufacturing, and new consumption are the long-term path;

3. Limited policy resources: Rather than blanket deployment, targeted measures are preferable — "targeted support" rather than "blanket stimulus";

4. Risk prevention takes priority: Stabilizing property price expectations and preventing systemic risk outrank stimulating growth.

This also implies that the main theme of China's macro fundamentals over the next 1–2 years will be "slow-variable repair" — policy will control the pace meticulously like an "actuary," rather than "easing wide and tightening hard" as in the past. For investors, the difficulty of adaptation lies in the fact that Chinese market participants (including both domestic and foreign institutions) have generally been conditioned by two decades of cyclical thinking — always fantasizing about the three-stage rocket of "policy bottom → liquidity injection → valuation repair." This mental inertia is likely to keep failing after 2025.

IV. The "Chinese-Style Diffusion" of AI: From Capability Narrative to Application Compounding

This is the weightiest and most information-dense section of the continuation. Using five cases — Bambu Lab, Unitree, Tencent GiiNEX, Doubao, and Horizon Robotics — the article sketches a complete logical chain: China's AI competitive advantage lies not in "first-mover innovation" but in "diffusion efficiency."

Case	AI application form	Core insight
Bambu Lab	On-device small neural networks for real-time print monitoring	AI embedded in physical devices, "invisibly" improving reliability
Unitree	Humanoid/quadruped robot costs moving down	Manufacturing scale turns "showpieces" into "industrial products"
Tencent GiiNEX	AI-enabled game production pipeline; city modeling from days to minutes	Using AI to lower content production costs and unlock development efficiency
Doubao	Daily active users surpass 100 million; growth through social sharing	Product design + ecosystem distribution, customer acquisition costs far below peers
Horizon Robotics	Autonomous driving entering via deployable ADAS; data flywheel loop	Iterative logic from "usable" to "good to use" in complex urban traffic

V. Several Micro Details Worth Revisiting

(1) Bambu Lab's "Sandwich Story"

Shenzhen clusters roughly 90% of global consumer-grade 3D printer production capacity. This geographic density brings not just supply chain cost advantages, but also an advantage in engineering iteration speed — "a compact digital brain built directly into the printer’s hardware" highlights an important characteristic of Chinese AI applications: AI is not a cloud-based function attached to hardware, but an embedded, chip-level, localized capability. This both avoids data compliance risks and improves response speed while lowering usage costs.

(2) Unitree's "Cost Philosophy"

"not only on capability but also on making robots affordable" — if all one sees is that humanoid robots can walk and maintain balance, one remains at the level of technology demonstration. Unitree's core strategic insight lies in: making robots "tools" rather than "showpieces" — quantity matters more than precision, and scale matters more than virtuosity. This approach forms a sharp contrast with the "AGI as the ultimate goal" narrative of US companies such as Figure AI — the Chinese path is closer to "first get robots working in factories, then gradually expand the capability frontier."

(3) Tencent GiiNEX's Efficiency Revolution

"city modelling from days to minutes" — this contrast is where AI's true value in the gaming industry lies. The bottleneck in game development is often not creativity but the repetitive labor of asset production and testing/validation. GiiNEX compressing "days" into "minutes" is essentially not incremental optimization but an order-of-magnitude restructuring of the production cost structure. Producing more content at lower cost, then monetizing through Tencent's operational and distribution capabilities — the boundaries of "gaming-as-a-service" have been substantially widened.

(4) Doubao's "Being Needed" Growth

The milestone of 100 million daily active users is indeed striking, but the more insightful signal is "unusually low user-acquisition and marketing spend." This reveals ByteDance's unique competitive moat in the AI era: product capability × ecosystem account system × social sharing loop. When AI tools are embedded in the daily behaviors of short video, social, and information distribution, user acquisition costs trend toward zero. This is fundamentally different from other AI companies' model of relying on massive ad spend to "buy" users — in the former, users actively use the product because they find it "useful"; in the latter, companies force outreach because they "need growth." For long-term investors, this growth quality — "pull" rather than "push" — determines retention rates and the length of the life cycle.

(5) Horizon Robotics' "Wisdom Constrained by Reality"

"shipping capability, not promises" is a sobering reminder for the autonomous driving industry. China's complex road conditions dictate that a "one-step" Robotaxi model cannot rapidly cover the entire territory, while the progressive ADAS (Advanced Driver Assistance Systems) approach — first accumulating data on mass-produced vehicles, then optimizing algorithms, then unlocking higher-level functions — forms a commercially self-consistent and technically solid positive loop. More importantly, Horizon Robotics' bundled "software + computing platform" solution provides Chinese automakers going global with differentiating capabilities at the level of "intelligent driving infrastructure" — a new narrative of globalization.

VI. The Savings Overhang: A Data Point Where "Tail Risk" and "Huge Option" Coexist

Household deposits exceed RMB 160 trillion (approximately $22 trillion), amounting to almost half of GDP or more. The significance of this figure cannot be measured by simply asking "is it more or less"; it is essentially a potential behavioral option.

From the negative perspective: residents not consuming, not investing, and only saving indicates that confidence remains weak, expectations are cautious, and income growth expectations are unstable — typical features of a "balance-sheet-style" repair.

From the positive perspective: this is a "super ammunition depot." As long as marginal confidence recovers, even if only 5%–10% of existing deposits shift into consumption or long-term financial assets, the scale would be on the order of RMB 8–16 trillion — enough to cause significant changes in macro data.

For capital markets, this "ammunition depot" means: the upside option is more asymmetric than the downside risk. The expectations implied by current valuations are very low (because everyone is looking at the "bad data"), and once saving behavior undergoes a marginal shift, the elasticity of asset prices will be amplified many times over.

VII. Concluding View: What Did 2025 Define?

If one were to summarize the characteristics of China's 2025 economy reflected in the continuation in a single word, the author believes it would be "transition." From real estate to new quality productive forces, from investment-driven to consumption-prioritized, from cyclical stimulus to structural policy, from AI laboratories to AI factories — none of these transitions is smooth, but the direction is consistent.

The most persistent underlying thread of the continuation is: China is undergoing a shift in evaluation standards from "quantity of growth" to "quality of growth." GDP growth is no longer the only number that matters; what matters more is the direction and speed of structural change — which is precisely what long-term investors should truly anchor to.

For a long-term growth fund such as the Baillie Gifford China Growth Trust, transition periods of this kind are precisely the best window for building positions: when market sentiment is depressed, competitive noise is at a minimum, and genuine α is more likely to come from independent judgment about companies' technology curves and product penetration rates than from speculating on short-term macro data.

The Investment Logic of "Constraint-Driven Efficiency" as Seen in the MiniMax Case

The MiniMax case provides a concrete sample for understanding the competitive philosophy of Chinese AI companies. The founder's remark about achieving "roughly 90% capability at around one-tenth the cost" is not a simple price-war strategy but a rational positioning based on market structure — in a reality where price-sensitive users and enterprises constitute the majority, extreme cost-performance is itself a moat. More critically, its product matrix spans full-modality coverage across text, image, video, and audio, showing that low cost does not come at the expense of breadth.

The value of this case also lies in its reflection of a structural shift in AI industry compute demand: as inference replaces training as the dominant driver of compute consumption, the deployment cost of models, rather than training capability, will become the core competitive dimension. This happens to be Chinese companies' sweet spot — optimization capabilities honed under constrained compute conditions have transformed from "forced frugality" into "proactive efficiency advantage."

AI Investment Methodology: Rejecting the "Winner-Takes-All" Narrative

The management team explicitly states that it does not attempt to identify a single "winner" at the model layer, but instead focuses on companies with durable distribution channels, data advantages, and clear monetization paths. This stance forms a sharp contrast with the market's prevalent "finding the next OpenAI" narrative. The logic: model-layer technology iterates too quickly for first-mover advantages to be locked in; whereas companies like Tencent, Alibaba, and ByteDance hold user access points and contextual data, allowing AI capabilities to be embedded into existing business models for rapid monetization. This is a "tool theory" rather than "horse-race theory" investment philosophy — treating AI as a lever to enhance existing businesses, rather than as an independent source of value creation.

Emerging Markets: The Underappreciated Main Stage for AI Diffusion

Most attention in the AI race centers on the US-China rivalry, but the original text raises a point obscured by high-frequency narratives: the next wave of adoption will come from emerging markets. In these regions, cutting-edge performance often takes a back seat to cost, local deployment capability, and language support. The case of Chinese models' promotion in Africa deserves closer examination — they can be flexibly deployed on local infrastructure, lowering the adoption threshold for startups and public services. This reveals a diffusion path different from the US model: US AI companies rely on expensive closed-source APIs, while Chinese open-source, low-cost models are in effect fulfilling the function of "AI democratization." If this trend continues, China may gain more enduring global influence by defining AI technology standards in emerging markets than through model leadership alone.

Quantitative Evidence of China's Long-Term AI Advantage

Dimension	China	US	Data source/notes
Share of global AI researchers	~50%	—	Public remarks by NVIDIA CEO Jensen Huang
Share of global AI patents granted	~70%	—	Stanford 2025 AI Index
Ultra-high-voltage transmission lines	~8,200 miles	~375 miles	~22x gap
Industrial electricity prices in some regions	~half of US levels	—	Quoted in the original text

Talent density and energy costs constitute a dual "infrastructure advantage" — the former provides the human capital for sustained innovation, while the latter directly lowers the marginal cost of training and inference. The UHV grid data is particularly noteworthy: the explosion in AI compute demand is fundamentally electricity demand, and China's ultra-large-scale investment in power transmission infrastructure means compute can be deployed at lower cost to energy-rich regions — a systemic advantage that the US's decentralized grid structure cannot easily replicate.

A New Narrative of Geopolitics: From "Confrontation" to "Tactical De-escalation"

The geopolitical trajectory of 2025 exhibits clearly nonlinear characteristics: the year began with the Trump tariff shock (a 10% additional tariff on Chinese imports in February) and tightened technology export controls constituting a pressure peak; the DeepSeek incident then became a "fresh geopolitical flashpoint" in Washington's assessment of China's AI capabilities. But the original text points out that the relationship between the two sides subsequently exhibited "tactical de-escalation" rather than "reconciliation" — high-level communication reduced the risk of immediate escalation while preserving fundamental competition in the technology-security domain.

This judgment has operational significance for investing: sanctions screening and export-control awareness have become a routine part of due diligence, rather than event-driven ad hoc responses. The majority of companies in the portfolio derive revenue primarily from China and non-US markets, making geopolitics more "noise" than "signal" — which explains why the portfolio can remain stable under sustained tariff threats.

The Dual Dimension of Valuation: Not Absolutely Cheap, Relatively Attractive

Valuation metric	MSCI China	MSCI World	Difference
Price/earnings (P/E)	~16x	~25x	Discount of ~mid-30%
Comparison to long-term averages	Roughly at or slightly above some long-term averages	—	Depends on the time window and trailing/forward

As of end-January 2026, MSCI China's absolute valuation (mid-teens P/E) does not exhibit the characteristics of historic undervaluation — a contrast with the "gold everywhere" narrative found in some emerging-market investment stories. But the mid-30% discount to MSCI World, combined with clarified policy direction and multiple industries at cyclical bottoms, constructs an asymmetric risk-reward structure: valuation protection on the downside, and elasticity from fundamental improvement on the upside.

The TikTok Deal's Implications: Structured Resolution of Political Risk

The eventual resolution of the TikTok case provides an important precedent: resolving political risk through equity structure design rather than through litigation or exit. In the transaction structure, the US entity is under non-Chinese control, with ByteDance retaining only a minority economic interest, transforming the previous "ban vs. no-ban" binary into a more stable operating framework. This matters for the portfolio: it demonstrates that some of the geopolitical risks facing Chinese assets can be substantially mitigated through commercial structural arrangements, rather than necessarily devolving into a zero-sum game.

Data Validation of Portfolio Characteristics

Metric	Value	Meaning
Number of holdings	40–80 stocks	High concentration, distinct from broad-based indices
Active Share	62%	Significant deviation from benchmark, reflecting active management intensity
Annual turnover	19.1%	Average holding period of over 5 years, consistent with a long-term investment style

This portfolio structure reveals management's strategic choice: in the highly volatile geopolitical environment of 2025, it did not choose to address uncertainty by reducing positions or adding hedges, but instead relied on deep research and concentrated holdings to navigate through the noise. The low turnover indicates that most investment decisions were made based on medium-to-long-term industry trend judgments, rather than short-term event-driven moves. This is consistent with the aforementioned stance that "AI is a marathon" — the construction of the portfolio is itself a practice of long-termism.

Combined with the content of Section 6, the significance of this annual report lies in providing a "verifiable chain of evidence": valuation discipline is no longer a set of abstract principles but is embedded with explicit tools, trigger conditions, and actual execution results. This section focuses on three additional key points: the two-way operating logic of the capital cycle, the internal contradictions in attribution data, and how investment tools translate into real evolution in portfolio structure.

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I. Capital Circulation as a 'Checklist': The Thematic Logic Behind Buy-Sell Swaps

In the previous section (the sequel), the thematic direction of new buys and sells was initially discussed. More important, however, is that the 'internal rebalancing' character revealed when the buy and sell lists are placed side by side is far more than a simple risk-reducing trim.

Direction	Representative Companies	Theme Classification	Logic / Interpretation
New buy	Anta Sports, Atour, H World	Consumer/Services	Covers sportswear, hotels, business travel — the premium service-consumption upgrade path
Sell	Li Ning, Proya, Shanxi Fen Wine	Consumer/Discretionary	"Cage-swapping" within the same broad sector, shifting from brand-aging risk to new-cycle leaders
New buy	Didi	Mobility platform	Competition in the mobility sector is stabilizing; policy risk is being cleared in phases
Trim	Meituan	Local-life platform	Intensity of competition in instant retail and food delivery is rising, increasing uncertainty in unit economics
New buy	Tianqi, Ganfeng	Lithium resources	Left-side positioning in the bottom zone of the upstream lithium price cycle, with option value from the energy transition
New buy / add	Zijin Gold International + Zijin Mining	Gold/Copper	"Chain-style allocation" along the industry chain, holding both the parent and the spun-off subsidiary to capture re-rating and focus benefits
New buy	RedNote	Consumer/Social e-commerce	A buyer-driven content e-commerce platform, further strengthening the consumer-internet map

Breaking it down, there are two clear rotation threads:

1. "New-for-old" rotation within the consumer sector: selling Li Ning, Proya, and Shanxi Fen Wine — companies that benefited from post-pandemic "consumption recovery" expectations but saw divergent fundamental delivery; buying Anta, Atour, and H World, which have stronger logic around rising chain penetration, brand upgrading, and operational efficiency. This is an alpha rotation within the same broad category, not an exit from the consumer track.

2. "Risk-appetite rebalancing" across traffic platforms: reducing Meituan while keeping Tencent/Alibaba/ByteDance and adding Didi — the three correspond to tracks with different competitive intensity today: in instant retail, Meituan faces multi-front battles against JD.com, Taobao, and Douyin; while in mobility, Didi's competitive landscape has improved relatively after the ride-hailing price war cooled. This reflects a re-rating of "competitive moats" across platforms.

II. The 'Internal Tension' in Attribution Data: Selection Contribution Maximized, Allocation Contribution Weak

The data most worth mining in this section is the attribution structure:

Attribution Dimension	Contribution (ppt)	Share of Structure
Selection effect	+8.3	80%
Allocation effect	+1.9	18%
Total relative return	+10.4	100%

On the surface, this is a classic case of "selection trouncing allocation." But magnifying the sector data reveals that the selection advantage is highly concentrated in a few non-traditional weight sectors:

Sector	Portfolio Weight vs Index	Total Contribution	Selection Contribution	Allocation Contribution
Consumer Discretionary	—	+2.1%	—	—
Industrials	—	+2.1%	+2.2%	-0.1%
Financials	6.2% vs 19.5%	+1.6%	+0.8%	+0.7%
Communication Services	Heavily overweight	+1.4%	Weak	+1.3%
Materials/IT	—	+1.1% / +0.9%	Dominant	Weak

Most unusual is the financials sector's "excess win":

• A significant underweight of 13.3 percentage points in allocation (6.2% vs 19.5%), yet the allocation effect is still positive (+0.7%) — indicating that underweighting financials was itself "correct";
• The selection effect (+0.8%) is also positive — meaning that despite the underweight, the fund still picked the three leaders that beat the benchmark: China Merchants Bank, China Construction Bank, and Ping An of China.

This is a typical case of "negative beta exposure + positive alpha capture": avoiding the sector's overall mediocrity while retaining its best top-tier assets. In other words, the presence of three financial companies (Ping An, CMB, CCB) among the top ten holdings is not contradictory to the overall underweight in financials — the portfolio is heavily underweight at the aggregate sector level, yet it selects the sector's leaders within, receiving a positive contribution from the combination of both. This itself embodies the philosophy of "deferring allocation authority to selection authority."

III. The 'Catalyst Taxonomy' of Stock-Level Contributions: Three Distinct Revaluation Paths

The three largest positive contributors belong to different return-driving modes:

Stock	Relative Contribution	Active Weight	Driver Type
ByteDance	+1.70%	Average weight ~10.3%	Risk-event elimination + upward shift in valuation centroid
Zijin Mining (H)	+1.62%	+1.94%	Commodity cycle upturn + spin-off catalyst
Pop Mart	+1.46%	+2.28%	Product narrative upgrade + accelerating internationalization

ByteDance's revaluation logic deserves separate elaboration:

• The text explicitly notes that the interim report raised the valuation by approximately 30%, driven by three factors: double-digit revenue/cash flow growth, higher valuations among comparable listed peers, and a narrowing of the TikTok US risk discount.
• What is most distinctive about this narrative is that the structural arrangement of the TikTok US transaction changed the 'denominator logic' of the valuation. Placing the US business in an independent entity not controlled by China, with ByteDance retaining only a minority economic interest, effectively stripped out part of the "geopolitical valuation discount" and converted uncertainty into a quantifiable minority equity value. This is a "risk-driven revaluation" of the overall valuation framework, not a purely earnings-driven one.
• More critically, this case demonstrates an important trait of private company investing: compared with listed companies, private company valuations are more prone to step-function jumps from a single material event — and the fund manager can capture such changes through continuous follow-up valuations. This, to a degree, explains the rationality behind the portfolio assigning ByteDance an average weight of more than 10%.

Pop Mart's case, meanwhile, is a typical exercise in 'narrative platformization':

The global success of Labubu has redefined Pop Mart from a "Chinese trend-toy company" into an "IP operation platform." This shift in cognitive framework tends to trigger a re-rating of the valuation multiple, not merely a linear extrapolation of earnings growth. This is consistent with the logic of having Moutai, Anta, and Pop Mart simultaneously among the top ten holdings: all are brand-asset-driven companies with the ability to transcend their domestic market boundaries.

IV. Decoding the Structure of the Top Ten Holdings: The Center of Gravity Across Three Asset Categories

The top-ten list itself sends a clear signal:

Category	Companies	Count	Functional Role
Platforms/AI	Tencent, ByteDance, Alibaba	3	The portfolio's "growth engine"
Financials/Infrastructure	Ping An, CMB, CCB	3	The portfolio's "value stabilizer"
Energy transition/Resources	CATL, Zijin, Weichai	3	The portfolio's "cyclical option"
Consumer franchise	Kweichow Moutai	1	The portfolio's "cash flow foundation"

One noteworthy tension: financials occupy three seats, yet the stock-selection logic is not fully aligned with the "structural growth" framework discussed earlier — CMB and CCB are typical high-dividend/low-valuation value stocks, while Ping An combines insurance and asset-management attributes. The rationality of this allocation lies in the fact that the portfolio is underweight the financials sector as a whole at 6.2%, yet at least two of the top ten seats are financials, indicating this is a "selective holding of financial leaders" rather than a "financial allocation need." In other words, they are selected for individual-stock quality, not for sector preference.

ByteDance ranks second with 10.4% of assets; combined with Tencent and Alibaba, the aggregate weight of platform companies is even higher — this is the portfolio's true source of alpha. The top three platform companies together contributed the vast majority of the excess return.

V. The 'Second Private-Company Seat': RedNote's Portfolio-Level Significance

Buying RedNote is an event whose signal significance outweighs its position size:

Dimension	Description
Investment size	Specific amount not disclosed, but total private-market exposure of the portfolio is below the 20% of GAV limit
Existing holdings	ByteDance (largest single holding, ~10.4%) + RedNote
New-buy logic	Two-sided network effects of social discovery + e-commerce

The key is the investment path: the text emphasizes "a long period of monitoring and repeated engagement with management" — reflecting the "hands-on due diligence" character of private investing. Before RedNote, Baillie Gifford had already held ByteDance for years, accumulating experience in handling unlisted equity valuation, governance structures, and exit paths. The arrival of a second private holding shows that private companies are gradually moving from a "special exception" to a "normalized portfolio allocation" — underpinned by a clear policy cap (20% of GAV), a systematic valuation-review mechanism, and the ability to interact deeply with investee management.

This also hints that if a third and fourth private holding appear in due course, it will no longer be surprising. With primary-market valuations in China having broadly retreated, buyer bargaining power has improved, and such assets may gradually become an important source of differentiation between this portfolio and other China growth funds.

VI. Beta Enhancement from 'Net Leverage + Full Deployment': An Easily Overlooked Source of Return

Though brief, the description of the capital structure near the end of the text is an important component for understanding the full-year 34.0% NAV return:

Capital Structure Element	Direction of Impact on Return
Moderate net leverage	Positive contribution (amplifies upside elasticity)
Low cash/deposit allocation	Slightly negative contribution (underweight cash relative to benchmark)
Combined effect	Slightly net positive contribution

The meaning of these data: in 2025, the portfolio did not win on stock selection alone; it also amplified its overall beta exposure via "full deployment + moderate leverage." Given that the benchmark index rose 22.2% while the portfolio's NAV rose 34.0%, of which stock selection contributed 8.3 percentage points, the remainder came from beta, leverage, and a small amount of FX and other trading items. This implies:

• Without leverage, the portfolio's selection alpha would still reach high single digits;
• The introduction of leverage amplifies the same alpha into excess returns of nearly 12 percentage points;
• This approach works in rising markets, but magnifies drawdowns during sharp declines — which is exactly why the tools section emphasizes "valuation dispersion alerts" and "anomalies detection": systematic risk monitoring is a necessary precondition for leverage use.

VII. Concluding Observations: The 'Triple Evolution' Reflected in This Disclosure

Based on the information in Part 6 of this article, one can see the three-level evolution of the portfolio management framework over the past year:

1. Tool-level evolution: from "qualitative valuation judgment" to an institutionalized process of "buy reference points + portfolio valuation-dispersion monitoring + anomaly alerts," making discipline executable, traceable, and reviewable.

2. Operational-level evolution: from "accompanying quality companies through cycles" to "actively recycling capital within a structural-growth framework" — swapping Meituan for Didi, Li Ning for Anta, and expanding from a Single Private (ByteDance) to a Double Private (ByteDance + RedNote); each operation carries a clear cost-of-capital comparison logic.

3. Attribution-level evolution: using "selection contribution 8.3pp vs allocation contribution 1.9pp" as evidence, it precisely defines how this portfolio makes money — not through sector rotation, not through luck with market style, but through "excess operating results of specific business models at specific points in time."

Ultimately, all these data points point to the same conclusion: this remains a bottom-up growth portfolio at its core; but while maintaining bottom-up stock selection, it has added a top-down risk-management framework, using valuation discipline as the connector between the two. Against a backdrop where China market sentiment can reverse quickly, this architecture of "selection offense + disciplined defense" precisely explains why a 34.0% return could be built on a level of valuation risk exposure that is not high — relative to the benchmark.

Part 7/17: From Position Moves to the 2026 Outlook — Liquidity Management, Valuation Discipline, and Structural Opportunities

This section shifts from analyzing "negative contributors" to the "2026 outlook" and supplies several key details about the investment process. It thus offers a closed-loop "decision–execution–feedback" perspective on how the fund actually behaved when dealing with high-volatility names and macro uncertainty, and reveals how it balanced concentrated holdings against risk constraints.

1. Private-Asset Valuation Governance: External Independence Matters More Than One Might Think

The report clearly states that ByteDance's valuation process is handled by Baillie Gifford's internal valuation committee, with independent input from S&P Global, and uses "trigger events" (such as major corporate or regulatory developments) as the basis for ad hoc valuation adjustments outside the regular cycle. The value of this disclosure:

• External independent input reduces the risk of "self-serving" valuations. As an authoritative data provider, S&P Global's valuation opinion creates a traceable reference framework, more credible than relying on a single internal model.
• The "trigger event" mechanism compensates for the lag of periodic valuations. For private companies, material changes (such as progress on the TikTok ban or a new funding round) can occur between two regular valuations. This mechanism ensures that the valuation does not drift out of touch with reality for months.
• It contrasts with the valuation logic of public-market assets. Public stocks have market quotes at every moment; private companies do not. The fund's 10.5% portfolio weight for ByteDance, if placed in a traditional publicly-priced fund, would inevitably invite dual criticism over liquidity and valuation discounts. Through this rigorous governance process, however, the fund provides investors with transparency while also creating a disciplinary foundation for long-term holding.

It is worth noting that ByteDance's valuation rose from £14,429K to £21,349K (+48%) in one year, while Tencent grew only about 30% over the same period. Given that the market has repeatedly re-priced TikTok risk, these numbers suggest the fund's internal assessment of ByteDance on an "ex-US business value" basis was quite optimistic — precisely a manifestation of the subjectivity inherent in private valuation. External governance cannot eliminate subjectivity, but it at least ensures that this subjectivity has been subjected to multiple rounds of scrutiny.

2. The Discipline of 'Pruning': The Contrasting Evidence from Zhongji Innolight and Meituan

The report mentions Zhongji Innolight (+437% return) among the positive contributors and explicitly states that it "trimmed the position to realize some gains and reallocated to other opportunities with higher expected returns." Among negative contributors, Meituan similarly saw "a significant reduction during the year to realize profits from the previous year's strong performance." This creates an interesting "selling winners and selling losers" balance:

Company	Relative Contribution	Active Weight	Annual Share Performance	Action Taken
Zhongji Innolight	+1.30%	~+0.76%	+437%	Trimmed, rebalanced
Meituan	-0.57%	~+0.90%	Under competitive pressure	Significant mid-year reduction
DPC Dash	-0.46%	+0.43%	Expansion-cost concerns	Not mentioned
Sunny Optical	-0.41%	~+1.18%	Weak demand	Not mentioned

Looking at the ratio of relative contribution to active weight, Zhongji Innolight leveraged +0.76% of active weight into +1.30% of relative return — extremely efficient; Meituan, by contrast, generated only -0.57% of drag from +0.90% of active weight, indicating that the stock's benchmark return was not particularly poor, but rather lagged its peers. This reflects two principles in the fund's dynamic management:

• Avoiding "being stuck on a tiger": After Zhongji Innolight's share price surge, even if the long-term logic was unchanged, its weight could exceed the intended risk budget simply because the price rose automatically. An active trim was a recalibration of portfolio risk, not a rejection of the fundamentals.
• Acknowledging the failure of the "competitive cycle": Meituan's case shows that in China's local-life services, changes in competitive intensity can rapidly cut profit expectations. The fund's reduction was not a judgment that the company's long-term value was impaired, but rather a recognition that the market might continue to punish the "cash-burning" model in the near term.

This behavior of "selling winners and buying strong names" (in fact, "selling winners, selling losers, and buying the middle") differs from traditional momentum chasing or panic selling; it reflects management of the risk budget, not short-term prediction of stock performance.

3. Three 'Uncorrelated' Types of Negative Contributors

DPC Dash and Sunny Optical dragged returns for entirely different reasons: the former on concerns about expansion costs and the path to profitability, the latter on the consumer-electronics cycle and price wars. These three negative cases (plus Meituan) essentially represent three distinct dimensions of risk:

1. Competitive-structure risk (Meituan): changes in industry structure push the profit-margin center of gravity lower;

2. Growth-execution risk (DPC Dash): the business model works, but there is a mismatch in timing between capital expenditure and profitability;

3. Cyclical-demand risk (Sunny Optical): macro or consumer-electronics inventory cycles suppress near-term revenue.

These three dimensions often require different tools in investing: competitive-structure risk requires judging whether long-term moats are affected; growth-execution risk requires assessing management's ability to adjust the pace; cyclical risk requires a tolerance test. The report does not indicate whether the fund adjusted its positions in DPC Dash or Sunny Optical, but it does suggest that "long-term opportunities remain," implying that the fund may accept medium-term volatility rather than trying to react at every quarterly-report juncture. This classification mindset helps investors understand that the portfolio's short-term volatility does not all come from the macro environment; it is the combination of multiple micro factors.

4. The Valuation Window: 16x P/E Is Not 'Low' — It Is 'Relatively Asymmetric'

The report notes that China's major equity indices currently trade at a P/E of about 16x, versus a historical range of 10x–25x. That is actually near the median, not an absolute "undervaluation." The real opportunity lies in the gap relative to global markets (especially the US market, which has a 60% weight). A comparative perspective can be offered here:

Market/Index	Current P/E (trailing 12 months)	Historical Range	Notes
Major China indices	~16x	10x–25x	Near median
S&P 500	~22x–25x	12x–30x	Near historical highs
Emerging markets ex-China	~13x–15x	8x–20x	More volatile

If measured by the percentile of P/E relative to its own history, China is not extremely cheap; but looking at the combination of "growth rate/valuation," Chinese technology and AI-related companies (such as Zhongji Innolight) have far higher earnings growth than their US counterparts while trading at significantly lower P/Es — the basis of "asymmetry." The report further mentions that the portfolio currently holds multiple "outlier" companies (AI, automation, core technologies) that are expected to double within five years. This differs from traditional value investing (buying low P/E) and emphasizes a "growth discount" — that the market has not yet fully priced in sustained compound growth.

This means the significance of 16x is not the multiple itself, but the margin for error it provides: even if earnings growth falls short of expectations, there is limited room for valuation contraction; while if growth materializes, the upside elasticity is significant. This potential "Davis double play" path is exactly why the fund treats it as a "low bar."

5. The 'Leverage' Effect of Household Balance Sheets: Two-Way Feedback Between Savings Rates and Confidence

One argument in the report worth expanding is: "Household balance sheets are strong and savings are ample, so even a modest improvement in sentiment can generate significant momentum." This judgment has data support:

• China's household savings rate has long been around 30%–35%, far higher than the US (~8%) and the global average (~25%);
• From 2022 to 2025, China's cumulative excess household savings exceeded US$2 trillion, but they have not been fully converted into consumption, because the decline in the housing-wealth effect and employment uncertainty have suppressed willingness.

The real "bottleneck" is therefore confidence and expectations, not purchasing power. When policy stabilizes the property market and improves employment signals, households' expectations about the economic outlook improve marginally, prompting some savings to be released. Even if that release is only 5% of the stock, its absolute size would be enough to offset weak external demand. This "asymmetry" is often underestimated in macro analysis: the economy does not recover linearly in response to minor policy changes, but it may jump non-linearly on a turning point in confidence. The fund regards this as a "key swing factor" for 2026, consistent with China's current mechanism of "policy floor + market self-reinforcement."

6. The Double-Edged Sword of Position Limits: How the 20%/Benchmark+7.5% Rule Affects Private-Asset Allocation

The report details the investment policy's limit on a single position — the lower of "20%" and "benchmark weight + 7.5%" (measured at the time of investment). This provides a clear legal boundary for a large private holding such as ByteDance. Compared with other global growth investment trusts (such as Scottish Mortgage, which often holds private companies at significantly more than 10%), this rule appears more conservative. But its advantages are:

• It forces rebalancing: when a position exceeds the cap because the market has risen, the fund must sell part of it, thereby automatically locking in gains and preventing a "single bet" from getting out of control;
• It protects liquidity: private assets are illiquid, and if the weight is too high, it is difficult to exit when necessary. The 10.5% weight (ByteDance) and 12.1% (Tencent) are both below the stated cap, showing the fund's emphasis on "tradability."

On the other hand, the rule may also cause premature selling when a private company's valuation rises, missing the higher returns that a subsequent public listing might bring. Thus, the rule is not perfect; it is a clear, verifiable choice between discipline and flexibility. The phrase "staying in the comfort zone" in the report indicates that the management's enforcement of this rule is intentional rather than forced.

7. Summary: The Bridging Role This Section Plays in the Overall Report

Structurally, this passage completes the transition from "reviewing performance" to "looking ahead." It not only lists decision outcomes, but also explains the framework behind the decisions: multi-layered governance of private valuations, the mathematical rules for portfolio position boundaries, the distinction between types of "uncertainty" (TikTok risk rather than overall business risk), and an understanding of the elasticity mechanism of domestic demand. These details show investors that the fund is not simply "buying good companies," but has built a reusable decision system that sits between process constraints and long-term judgment.

In the 2026 investment context, the core value of this system is that market volatility will not disappear, but through disciplined trimming, transparent valuation governance, and identification of "asymmetric opportunities," the fund can maintain concentration while preventing tail risks from eroding long-term returns. This is also the true basis of the "cautiously optimistic" stance — it is not a bet on the macro environment, but confidence in the reliability of its own process.

Marginal Signals in Position Changes: From Consumer and Banks to Technology and Resources

The position data in this section reveal the portfolio's structural rebalancing over the year — not a simple "increase in China exposure," but rather screening names along two dimensions: earnings resilience and shareholder returns. Combined with the valuation and transaction data, the following perspective can be added:

Holding	2026 Valuation (£'000)	2025 Valuation (£'000)	Valuation Change	Weight Change (pct)	Net Buying/Selling (£'000)
Ping An of China	16,939	9,679	+75.0%	+2.2	(778)
Alibaba	8,376	4,984	+68.1%	+1.0	+739
CATL	6,537	5,315	+23.0%	-0.1	(122)
Zijin Mining	6,514	2,909	+123.9%	+1.4	(259)
Kweichow Moutai	5,426	6,268	-13.4%	-1.2	(514)
China Merchants Bank	4,870	5,057	-3.7%	-0.8	(242)
China Construction Bank	4,737	2,715	+74.5%	+0.6	+4,902¹
Weichai Power	4,818	—	New position	+2.4	+4,902¹

¹Note: The net-buy figures for China Construction Bank and Weichai Power contain a possible typesetting anomaly, but the rising weights and roughly doubled valuations indicate that both were material additions/new positions, with clear directionality.

• Ping An's "round trip" is worth pondering: valuation rose 75% yet the fund was a net seller, indicating that after enjoying the valuation recovery driven by technology enablement, the manager proactively reduced the weight of a single financial name. This is consistent with the fundamental fact that Ping An Life's new-business value growth remains below its 2019 peak — a case of "prudence within optimism."
• The logic of Zijin's ESG-discount convergence has been validated: the doubling in valuation was not driven by copper prices alone; Kamoa-Kakula's production ramp-up and the company's improved disclosure transparency occurred simultaneously. After the weight rose to 3.2%, the fund only made a small net sale (£0.26m), equivalent to passive holding rather than active reduction, indicating that it values the certainty of copper-mining revenue more than short-term copper-price fluctuations.
• The commonality in the trims of CMB and Moutai: both are high-ROE, strong-brand assets, but both faced industry headwinds in 2025 — CMB was weighed down by narrowing net interest margins and wealth-management fee cuts, while Moutai was hit by weaker high-end consumption demand. The fund's choice to rotate into lower-valuation CCB (0.5x P/B, 5% dividend yield) and the resource side (Zijin) was, in effect, a further compression of valuation risk premium without sacrificing quality.

One-Year Performance: Attribution of the Excess Return Jump from 3.0pct to 11.8pct

Metric	2026	2025	Change
NAV total return	34.0%	35.4%	-1.4pct
Benchmark total return	22.2%	32.4%	-10.2pct
Excess return (NAV)	11.8pct	3.0pct	+8.8pct
Share price total return	38.8%	29.4%	+9.4pct
Year-end discount	(7.4%)	(10.4%)	Narrowed 3.0pct

• The sudden widening of excess return is unlikely to come from a single sector: in 2025, the benchmark rose 32.4% and excess was only 3.0pct, suggesting that holdings were similar in composition to the benchmark. In 2026, the benchmark gain fell to 22.2%, yet the fund's excess rose to 11.8pct, implying a concentration of holdings in low-valuation, high-prosperity directions — for example, Zijin (weight up from 1.8% to 3.2%) and Ping An (from 6.1% to 8.3%) far outperformed the index heavyweights.
• Discount narrowing and share-price excess: the share-price return (38.8%) exceeded the NAV return (34.0%), reflecting either increased investor recognition of the fund's investment strategy or the greater rebound elasticity of high-discount funds when overall market risk appetite improves.
• Active share fell from 68% to 62%: on the surface, the portfolio moved closer to the index, but the contemporaneous sharp rise in excess return shows that this "convergence" was directional — concentrating positions in a few individual stocks with alpha, rather than equalizing exposure.

Portfolio Implications Under the Shift in Growth Engines

Looking at the direction of net buying and selling, the fund significantly reduced its exposure to consumer and joint-stock banking names in 2025/26 (net sales of Moutai and CMB totaling £0.76m), while using new positions in Weichai and increases in Alibaba and CCB to shift holdings toward the "self-sufficiency + energy/resources + financial stability" triangle.

• The addition of Weichai Power embodies the "earnings bottom" logic: it has a 35%–40% share of the diesel-engine market, with heavy-truck engine revenue accounting for roughly two-thirds of the total, highly correlated with the infrastructure and logistics cycle. China's industrial producer price index is already at a low level; if fiscal policy strengthens next year and drives infrastructure investment, Weichai's earnings elasticity is promising. In addition, the global warehouse logistics automation footprint of its subsidiary KION gives the position a growth element rather than making it a pure cyclical.
• The reduction in China Merchants Bank and increase in China Construction Bank are two sides of the same logic — both are excellent retail banks, but CCB trades at roughly 60% of CMB's valuation (about 0.5x P/B vs CMB's ~0.9x) and offers a higher dividend yield. The fund chose to hold the growth of Chinese consumer finance in a cheaper way while minimizing valuation risk.

Financial Leverage Considerations Behind Increased Borrowing

Bank borrowing rose from £6.1m to £7.7m, while total assets increased from £159.2m to £205.3m, leaving the leverage ratio essentially flat at 3.8%. But note that the absolute amount of borrowing rose by £1.6m, while the market value of Zijin Mining increased by £3.6m over the same period, indicating that some of the appreciated positions were not locked in through selling, but rather maintained long participation through borrowing. This is reasonable within the fund's long-term growth orientation — as long as the cost of borrowing is below the portfolio's expected return, it can enhance shareholder returns; but if markets are volatile, it also amplifies NAV drawdowns. Given the current holding structure, resource and technology stocks are more volatile than consumer finance, so this £1.6m of borrowing amounts to a small amount of leverage on copper prices and technology platform stocks — an aggressive act within acceptable limits.

In summary, the portfolio evolution reflected in this section is no longer a simple "repair of the China-asset discount," but a fine-grained reallocation based on industry earnings-cycle positions and shareholder-return levels. While enjoying the re-rating of Zijin and Ping An, the fund did not blindly chase highs; instead, it trimmed Moutai and CMB and bought CCB and Weichai, pushing the portfolio's valuation center of gravity further down and thereby reserving room for the next year's excess returns.

Earnings Drivers and Shareholder-Return Structure

Total shareholder return improved markedly this year, with total return per share of 86.81p, up 29.7% from 66.92p in the prior year. Of this, capital return of 83.83p was the absolute driver, contributing 96.6% of the total return; revenue return of 2.98p, though up 17.8% from 2.53p a year earlier, accounted for only a tiny share of the total. This indicates that the strong FY2026 performance was driven almost entirely by valuation recovery in Chinese assets, not by an unleashing of fundamental earnings.

Item (per share)	2026	2025	Change
Revenue return	2.98p	2.53p	+0.45p (+17.8%)
Capital return	83.83p	64.39p	+19.44p (+30.2%)
Total return	86.81p	66.92p	+19.89p (+29.7%)

The elasticity of capital return is far greater than that of revenue return, reflecting the beta characteristics of the growth stocks in the portfolio. That said, revenue return accounts for only 3.4%, meaning the fund has limited appeal for investors who depend on dividend income; its long-term holding value lies more in capital appreciation.

Five-Year Cumulative Performance: The Recovery Has Not Yet Recouped Lost Ground

The five-year total return chart (base period 31 January 2020 = 100) shows that NAV and share price experienced deep drawdowns in 2022–2024; despite a rebound in 2025–2026, the five-year horizon still lags the benchmark. Combined with the cumulative performance table (2016 = 100), this process can be quantified more precisely:

As of 31 January	2020	2021	2024	2026
NAV per share (rebased)	140	190	74	133
NAV total return	149	206	84	152
Share price total return	155	260	89	161
Benchmark total return	164	199	107	174

Over the five years from 2020 to 2026, the NAV total return rose only marginally from 149 to 152, effectively treading water; the share price total return went from 155 to 161, an annualized gain of under 1%; while the benchmark total return rose from 164 to 174, a cumulative increase of 6.1%. This means the fund significantly underperformed the benchmark over the past five years, equivalent to an annualized gap of roughly 1–2 percentage points (NAV annualized -6% vs benchmark -3%, see below).

Ten-Year Annualized Returns: Lagging the Benchmark Over the Long Term

The ten-year record (as of 31 January 2026) shows that despite the glorious peak in 2021, long-term annualized returns still trail the benchmark:

Annualized return	NAV per share	NAV total	Share price	Share price total	Benchmark	Benchmark total
3 years	2%	2%	1%	2%	1%	4%
5 years	(7%)	(6%)	(10%)	(9%)	(5%)	(3%)
10 years	3%	4%	3%	5%	3%	6%

Two additional points are worth noting:

• Dividend reinvestment contributes materially: over ten years, NAV per share annualized 3% while NAV total return annualized 4%, a gap of 1 percentage point; the gap is larger for share price (3% vs 5%), showing that dividends and the share-price discount have a real impact on long-term compound returns.
• Impact of the benchmark change: before 2020, the benchmark was the MSCI AC Asia ex Pacific; after 2020, it switched to the MSCI China All Shares Index, with data chained. Strictly speaking, the ten-year comparison spans different market universes, but the five years of post-2020 data all point to underperformance, so the conclusion is robust.

Cyclical Traces in the Ten-Year Record

The ten-year record table provides a complete evolution of asset size, premium/discount, leverage, and income structure. A few key years are selected for comparison:

Metric	2016	2021 (peak)	2024 (trough)	2026
Total assets (£'000)	170,388	271,424	125,301	205,340
NAV per share (p)	259.3	492.7	193.1	344.4
Share price (p)	231.0	548.0	181.0	319.0
(Discount)/premium	(10.9%)	11.2%	(6.2%)	(7.4%)
Revenue earnings/share (p)	4.3	4.5	2.4	3.0
Dividends/share (p)	4.7	7.2	2.2	2.5
Ongoing charges ratio	1.1%	0.7%	1.0%	1.1%

Several structural changes:

• Extreme swings in the premium/discount: the 11.2% premium in 2021 corresponded to extreme investor optimism about "China growth"; the 7.4% discount in 2026 reflects a turn to pessimism. The fund once traded near NAV and is now available at a discount, which in effect offers a potential buying opportunity — but it may also be the market pricing in lower expected returns for China.
• Deterioration in income quality: earnings per share rose from 4.3p in 2016 to 7.9p in 2019, then collapsed to 1.0p in 2022. Although it recovered to 3.0p in 2026, that is still less than half its level a decade earlier. Over the same period, dividends fell from 7.2p to 2.5p, indicating either volatility in the willingness and ability of Chinese companies to pay dividends, or a decline in the share of high-dividend names in the portfolio.
• Very low leverage: gross gearing has long stayed in the 3%–5% range, at 3%/4% in 2026. Even though policy allows borrowing up to 25% of total assets, management did not increase leverage at the 2024 market trough, missing a chance to add positions — but thereby avoiding even larger NAV drawdowns. The conservative posture weakened upside in bull markets but protected the downside in bear markets.

Investment Policy: The Balance Between Concentration and Diversification

The investment policy is made explicit in the sequel: the portfolio holds 40–80 securities, with a single-position cap equal to the lower of 20% or "index weight + 7.5%." Compared with the weight of the top ten stocks in China's all-market index (where Tencent, Alibaba, and others often exceed 5%), this rule permits an overweight of at most 7.5 percentage points in already-overweight names, which in effect limits active deviation from the index.

Unlisted securities may account for 20% of assets — a window for accessing excess returns from the private markets, but also a source of valuation risk. The 2026 annual report does not separately disclose the unlisted share, but in previous years it has usually been below 10%, indicating a cautious approach in practice.

On currency risk, the policy explicitly states that there is "no intention to hedge general currency or interest-rate risk through derivatives." This means that exposures to the renminbi, the Hong Kong dollar, and US-dollar assets outside China are passed through entirely to investors. Over the past five years, the renminbi depreciated against sterling, creating an additional drag for sterling-based investors. For example, if underlying assets are denominated in Hong Kong dollars — which is pegged to the US dollar — and sterling appreciates against the US dollar, some of the NAV growth is offset. This partly explains why the sterling-denominated benchmark total return was -3% annualized, while the index may have fallen less in local-currency terms.

Dividend Policy: Coverage Improved but Absolute Level Still Weak

The 2026 dividend is 2.5p per share, flat versus 2.5p in the prior year, but the earnings coverage ratio improved to 3.0p/2.5p = 1.2x, up from 2.5p/2.5p = 1.0x in 2025. In contrast, in 2016, the coverage ratio of 4.3p earnings-per-share to 4.7p dividends was 0.91, meaning the company dipped into profit reserves that year to fund the dividend; today it retains more earnings, creating a buffer for future capital reinvestment or an economic downturn, but it also shows that pre-tax earnings are not sufficient to support a restoration of high dividends.

From a total-shareholder-return perspective, dividend reinvestment contributed approximately 1%–2% of annualized excess return over the ten-year period (the gap between NAV per share and NAV total return). If income remains weak in the future, this contribution may shrink further. For income-oriented investors, the trust's dividend yield is around 0.8% (2.5p/319p), below the average for most UK investment trusts, and they would need to rely on capital returns as compensation.

Summary

The sequel's data clearly demonstrate the fund's "high volatility, strong cyclicality" characteristics: a Davis double play in 2016–2021, a double hit from valuation and earnings in 2022–2024, and a strong rebound in 2025–2026 that has not yet recouped the losses. Long-term annualized returns have underperformed the benchmark, partly due to the sharp rotation of China growth-style investing, and partly due to management's relatively conservative leverage and positioning strategy. The discount still stands at 7.4%, possibly indicating that the market is skeptical about whether management can outperform the benchmark in the next cycle. Nevertheless, net assets have repaired 78% from the 2024 trough, showing the portfolio's potential capacity to recover ground.

Five-Year Commitment and Four-Year Assessment: The 'Dual-Track Timeline' of the Viability Statement

The most intriguing part of the Viability Statement is that the board has set a five-year going-concern assessment period, yet embeds within the same passage a four-year assessment milestone — the conditional tender offer (announced in November 2024, running through 30 November 2028). This misalignment in time horizons is no coincidence; it is a deliberately designed "strategic duality":

• The five-year commitment sends a message to the market: the company's fundamentals are sound, no major strategic adjustments are expected, and it can continue operating over the medium to long term. This is a "conventional" going-concern signal.
• The four-year assessment is an "unconventional" constraint on performance — if the four-year performance to November 2028 is not met, investors will receive an exit channel at a price no lower than NAV less a specified discount.

From a capital-allocation perspective, the essence of this arrangement is trading time for space. If Chinese growth stocks continue to rebound over the next three years (as the momentum already visible in FY2025 suggests), NAV performance will most likely clear the hurdle, the tender offer will not be triggered, and the company's long-term capital structure will remain undisturbed. Conversely, if the market deteriorates again, the tender offer forms a liquidity cushion, reducing investors' fear of being "trapped."

The effectiveness of this dual-track design can be corroborated by the data: FY2025 NAV total return of 34.0% versus a benchmark of 22.2%, an excess return of 11.8 percentage points, providing substantive support for the board's "five-year sustainability" assertion. If a similar level of excess return can be maintained over the next two years, the "threat" of the four-year assessment will be largely neutralized.

Credit Window: The Refinancing Test Before April 2026

The credit-risk note in the Viability Statement centers on the revolving credit facility: US$25 million, two-year term, maturing on 11 April 2026. The board's wording is that "discussions with lenders regarding renewal are ongoing and no issues are anticipated" — but in an investment-trust context, such phrasing often implies the following underlying facts:

Dimension	Current Status	Potential Risk
Facility size	US$25m, a share of GAV well below the 25% cap	If the market falls and GAV shrinks, the leverage ratio will automatically rise
Maturity	April 2026	Only a few months after the annual report's release — a near-term refinancing event
Renewal negotiations	"Ongoing"	If terms change (rates, collateral requirements), costs will rise
Alternative options	87.8% of assets are listed securities, can be liquidated quickly	Forced sales would incur transaction costs and tax liabilities

An easily overlooked detail is that the borrowings can be used to "meet liabilities as they fall due," and 87.8% of the asset side consists of listed securities with ample liquidity. This means that even if renewal fails, the company could in theory cover the credit exposure by liquidating assets. The essence of credit risk, therefore, is not "whether it can repay," but "whether it is forced to sell assets at an inopportune market moment." This explains why the board runs joint stress tests linking liquidity risk with geopolitical risk — if China's equity market plunges due to an external shock while the credit facility is not renewed, the dual pressure would significantly erode NAV.

From a timeline perspective, 2026 will be a key validation year for the company: it must complete the credit refinancing while ensuring that the portfolio does not deviate from long-term growth objectives because of liquidity pressure. The investment discipline at the market trough four years ago (2022) is precisely the source of today's sharp NAV rebound — an experience that shows maintaining the ability to "have capital to deploy" is more important than "running fully invested" itself.

The Symmetrical Narrative of the Risk Matrix: Financial Risk 'Up' and Strategic Risk 'Down'

This year's risk ratings present a noteworthy mirror-image structure:

Risk Category	Rating	Trend	Primary Drivers
Financial risk	High	Increasing	Macro uncertainty, geopolitics, elevated inflation and interest rates
Investment-strategy risk	Moderate	Improving	NAV excess return of 11.8%, improving environment for growth stocks
Discount risk	Moderate	Improving	Share buybacks during the year + narrower discount + tender-offer commitment
Operational/compliance risk	Low	Stable	Mature outsourcing structure; replacement suppliers can be switched quickly

This mirror-image relationship of "financial risk rising, strategic risk falling" reveals a hedge between market risk and active-management skill: systemic macro volatility cannot be eliminated, but its actual impact on investor returns can be offset through excess stock-selection ability and discount-management tools.

More specifically:

• The rise in financial risk is centered on "elevated inflation, interest rates remaining high, and geopolitical tensions." These three factors jointly affect China growth-stock valuations — interest rates affect the discount rate, inflation affects profit expectations, and geopolitics affects sentiment and capital flows.
• The decline in strategic risk is evidenced by the 34.0% vs 22.2% excess return. The report notes that "market conditions for growth stocks are improving," implying a growing resonance between the investment philosophy and China's economic structural transformation.

The lesson for investors from this mirror-image relationship is: when assessing the trust's risk, one should not look at any single risk category in isolation. The decline in strategic risk effectively offsets part of the rise in financial risk — the metric that ultimately matters is the cumulative excess return of NAV total return over the benchmark, not the absolute level of the benchmark itself.

The Other Side of '87.8% Listed Securities': The Hidden Liquidity Cost of the Unlisted Portion

The report explicitly states: "87.8% of the portfolio consists of listed securities, which can be sold at any time to repay liabilities as they fall due." The subtext of this figure is often misread — it implies that the remaining 12.2% consists of unlisted assets. For a China growth-stock trust, the unlisted portion usually includes primary-market pre-IPO investments and similar assets; these are far less liquid than listed securities, and their valuations lag in time.

One detail worth attention is that the annual report does not provide detailed disclosure of the unlisted portion's industry distribution, holding period, or exit path. From a risk-management perspective, this means:

• The actual boundary of liquidity adequacy depends on whether the unlisted assets can be sold or transferred when needed;
• If a liquidity crisis arises in the future, the company may be forced to transfer unlisted assets at a discount, resulting in NAV erosion;
• The high liquidity of the 87.8% also means the company has sufficient buffer to sell the listed portion first under stress scenarios, rather than rushing to dispose of the unlisted portion.

In essence, this structure is a "liquidity ladder": the first layer is listed securities (87.8%), the second is the credit facility (US$25 million), and the third is unlisted assets (approximately 12.2%). The layers form a progressive sequence, allowing the company to arrange the order of asset sales calmly even under extreme stress.

The Upgrade of Discount Management as a 'Multi-Pronged Approach': From Buybacks to a Conditional Tender Offer

The improvement in the rating under "discount risk" in the report is not merely a benefit of the market rebound. In fact, the company's discount-management toolkit changed on two levels during the year:

Level one: routine buybacks. "The company continued to repurchase shares during the year ended 31 January 2026." This is a common discount-support tool in investment-trust management, supporting the market price by reducing supply.

Level two: conditional tender offer. Announced on 13 November 2024, with a four-year performance hurdle (through 30 November 2028). This is more aggressive than routine buybacks because it is equivalent to writing a "performance put option" to investors — if performance is not met, the company must repurchase shares at a price no lower than a specified discount to NAV. This arrangement serves three purposes:

1. Locking in long-term investors: investors willing to remain holders are effectively expressing confidence that the company can clear the assessment hurdle;

2. Redefining the discount trading range: because of the mandatory repurchase commitment, once the discount reaches a certain level, arbitrage capital has an incentive to step in, forming a natural floor for the discount;

3. Constraining management: every investment decision is directly linked to the "assessment day" four years later — a time-binding that is stronger than annual evaluation.

From the board's perspective, this tool is equivalent to upgrading "discount management" into a "performance bet." It is not a regulatory requirement but a voluntary constraint, and therefore sends a stronger "shareholder value" signal to the market. If performance remains strong over the next three years, the tender offer's binding force will naturally dissipate, allowing the company to focus on investing.

Board-Structure Advantage: The Resilience of an Asset-Light Model with No Employees

The Viability Statement specifically notes that "all key operations of the company are outsourced to third-party service providers, which can be replaced within a relatively short period if necessary." This is essentially the core advantage of the "asset-light" model in the investment-trust industry:

• No fixed headcount costs: even if AUM falls sharply, operating expenses remain controllable;
• Service providers are replaceable: Baillie Gifford as investment manager is not irreplaceable (though replacement costs are high), while alternative suppliers for administration, custody, audit, and other roles are readily available in the market;
• The board is independent of management: there are no internal conflicts of interest, and decisions are more purely centered on shareholder interests.

In extreme market conditions (such as the Chinese equity market underperforming for many consecutive years), this structure allows the company to maintain low-cost operations and minimize "survival pressure" — directly supporting the judgment of "five-year sustainable operation."

The Five-Year Assessment: Why 'Five Years' Rather Than 'Three' or 'Ten'?

The five-year assessment window chosen by the board appears to involve a "term mismatch" with its long-term growth strategy (typically 5–10 years). On closer thought, however, five years is a compromise value that balances long-term strategy with investor patience:

• Three years or less: would not cover a full bull-bear cycle in China's equity market and would tempt management to focus excessively on short-term performance;
• Ten years or more: a time span too long for ordinary investors to map onto their actual holding periods;
• Five years: covers exactly a full cycle of "market trough → repair → overheating → adjustment" and overlaps sufficiently with the credit facility's term (two years), allowing it to capture operating evidence after refinancing.

More interestingly, the five-year assessment aligns remarkably well with the "five-year cyclical pattern" of China's equity market. The 2018 trough → 2021 peak → 2022-24 correction → 2025-26 rebound is almost a five-year cycle. If this cyclicality continues to hold, the next five years would be exactly a complete cycle of "buy low, sell high → timed exit."

Conclusion: The Essence of This Strategy Is the 'Appropriateness' of Control

Reading through this part of the strategic report, a core observation emerges: the magnitude of every risk-management tool has been carefully calculated — neither aggressive nor passive:

• The borrowing cap is 25%, but expected usage does not exceed 20%, and the actual credit facility is only US$25 million, leaving ample headroom;
• The cap on investments in other closed-end funds is 10%, with a 15% switch option for underlying funds, preserving flexibility;
• No formal discount target is set, but intervention capacity is maintained through a combination of buybacks + tender offer;
• A five-year assessment is used, but the four-year performance test serves as the substantive "hidden brake."

This "blank-space" governance style is best suited to an asset class as volatile as Chinese growth stocks. For investors, a management team that knows under what conditions it may "fail" is often more trustworthy than one that claims to be always right and always chasing the trend. Through the detailed presentation of the Viability Statement and the risk matrix, this report lays such a "falsifiable commitment" squarely on the table.

The Institutionalized Presentation of Risk Management: From 'Compliance Checklist' to 'Geopolitical Stress Tests'

This section serves a bridging function in the annual report — linking the preceding investment strategy and performance to the subsequent financial statements and governance details. Its narrative logic, however, is worth unpacking: the surface is a standardized risk register, while beneath it lies a structural anxiety shared by the UK investment-trust industry in the 2026 context.

Risk Matrix Overview: Types, Ratings, and Direction of Change

Based on the ratings and change trends of each risk in this section, a matrix can be compiled as follows:

Risk Category	Current Rating (inferred)	Change Trend	Management Intensity	Triggers
Share price premium/discount risk	Moderate	Stable	Medium-high (buyback authority)	Market sentiment and supply/demand imbalance
Regulatory risk	Moderate	Stable	High (multi-layer compliance review)	Changes in UK listing rules and tax law
Custody and depositary risk	Low	Stable	High (two-tier confirmation mechanism)	Failure of third-party controls or cyber intrusion
Operational risk	Low	Stable	High (business continuity planning)	System failure or service-provider interruption
Leverage risk	Moderate	Stable	Medium-high (stress testing)	Rising financing costs or market decline
Climate and governance risk	Moderate	Stable	Medium-high (ESG integration)	Shifts in investor preferences or adverse events
Cybersecurity risk	Moderate→High	Increasing	High (specialized due diligence)	Geopolitical tensions and AI technology evolution
Single-country risk	High	Increasing	Medium (diversification buffer)	China-specific geopolitical risk
Emerging-market risk	High	Increasing	Medium (inherent to strategy)	Rising US-China tensions and Taiwan-related issues

This matrix reveals a key message: all risks rated "Low" are concentrated at the operational-execution level (custody, systems), while all risks rated "High" with an "Increasing" trend are concentrated at the macro-geopolitical level. This divergence means that the company's controllable risks have been effectively compressed to low levels, and the remaining exposure is essentially the inherent cost of the investment strategy — the fate of a China-focused investment vehicle.

Leverage Risk: Refinancing Uncertainty in the Maturity Window

One detail in the leverage-risk description deserves special attention: the revolving credit facility matures in April 2026, and the company "is in discussion with its banks regarding renewal." In an annual-report context, this is a form of disciplined optimism — but given the market backdrop at the time, credit availability was not a given:

• Between 2024 and 2026, the UK investment-trust industry saw several cases of forced asset sales due to excessive leverage, particularly in the private-equity and infrastructure sectors. Creditors' attitude toward such structured financing has shifted from "book-value collateral" to a more cautious analysis of cash flow and discount rates.
• Chinese assets have traditionally enjoyed a relatively mature haircut framework in mortgage financing with Western banks, but under geopolitical pressure, there is a risk that this haircut will be repriced.
• The annual report's statement that "the Board does not currently anticipate any issues with renewal" itself implies that "discussion" is ongoing — rhetoric that in annual-report disclosure typically means uncertainty remains controllable but has not been fully eliminated.

From an asset-liability-management perspective, the "biannual liquidity stress tests" required under leverage risk are commendable. But the effectiveness of stress tests depends on whether the scenario assumptions cover extreme tail scenarios — for example, simultaneous trading restrictions on H-shares and A-shares in the portfolio, or periods when overseas capital cannot exit through the Stock Connect mechanisms.

Cybersecurity Risk: The Dual Attack Surface of AI Amplification and Hybrid Work

Cybersecurity risk is the only risk category in this section that explicitly provides two incremental rationales: an increase in geopolitical-driven malicious cyber activity + AI technology amplifying information-security risks.

This judgment is consistent with the actual evolution of the global cyber-threat landscape from 2024 to 2026:

• The democratization of AI-driven attack tools: generative AI has escalated phishing emails from "spray-and-pray" to "highly personalized customization," significantly increasing the success rate of social-engineering attacks targeting investment-management executives. As a global asset manager headquartered in Edinburgh, Baillie Gifford's attack surface has long exceeded physical boundaries.
• The persistence of hybrid work: service providers (including custodians, administrators, auditors) operate in a remote-plus-office hybrid model, meaning that traditional perimeter-defense models, before zero-trust architecture is fully mature, contain vulnerability windows in identity verification and endpoint compliance.
• Indirect exposure through portfolio companies: cyber risk exists not only in Baillie Gifford's own systems, but also in investee companies — especially Chinese technology and consumer companies, whose data-security compliance pressures and information-infrastructure security requirements have been rising steadily in recent years.

Single-Country Risk × Emerging-Market Risk: Double Overlap and 'Taiwan' as a Keyword

Single-country risk is rated High with an Increasing trend, and emerging-market risk is also marked Increasing; the two overlap on China as the underlying exposure. This section explicitly cites "US-China geopolitical tensions, particularly those related to Taiwan" as drivers of rising emerging-market risk — increasingly common risk language in China-focused fund annual reports, but the 2026 report has moved toward a more direct style.

This overlapping effect can be understood through a data framework:

Dimension	Developed Markets (benchmark)	China Market (current)
Market volatility (annualized)	15–20%	25–35% (event-driven increases)
Liquidity depth (average daily turnover/GDP)	High	Medium, and constrained by Stock Connect quotas
Foreign-ownership limits	None/very low	Industry- and stock-level limits exist
Currency convertibility	Full	Partial (onshore/offshore spreads)
Legal certainty (foreign-investor perspective)	High	Medium (foreign-related legislation such as the Anti-Foreign Sanctions Law adds complexity)
Frequency of geopolitical events	Low	High (Taiwan, technology bans, tariffs, etc.)

Notably, the annual report acknowledges that "investing in a single country is itself considered a strategy with higher risk than diversified investing," but does not treat this reality as a flaw — rather, as a core feature of the strategy. Such candor is uncommon in investment-trust annual reports, reflecting the board's "existence is justified" positioning of the strategy and its clear constraint on investor suitability.

The Asymmetry of Regulatory Risk: UK-Level Compliance and China-Level Exposure

The regulatory-risk section is highly focused on UK domestic rules (UK Listing Rules, Companies Act, investment-trust tax rules, Transparency Directive, Market Abuse Directive) — a correct compliance perspective, because the trust's listing status and its eligibility for exemption from capital-gains tax depend entirely on compliance within the UK jurisdiction.

Equally worth attention is the indirect dimension of regulatory risk: the regulatory changes faced by investee companies operating in China (such as data security, platform-economy governance, industry access policies), although already incorporated into the ESG and corporate-governance framework in China investment analysis, are not separately disclosed under the "regulatory risk" heading. This classification logic is consistent with the UK-regulatory-centric disclosure convention of investment trusts, but in the 2026 environment, the predictability of Chinese regulatory policy itself has become an important variable in how foreign investors price Chinese assets.

Custody and Operational Risk: The Governance Depth Behind a Low Rating

Custody and depositary risk and operational risk are both rated Low with a Stable trend. This rating rests on the operation of multi-layer control mechanisms:

• Custody layer: the depositary confirms asset-keeping status to the audit committee semi-annually; the manager performs independent cash and position reconciliations; for uncertificated private holdings, confirmation letters are further requested from investee companies — this "dual confirmation + independent reconciliation" mechanism effectively prevents custodian fraud events such as "disappearing assets" at the operational level.
• Operations layer: Baillie Gifford's business continuity plan (BCP) is one of the most rigorously supervised systems in the UK asset-management industry. The audit committee reviews its internal-control reports, while reports from key third-party service providers are also reviewed by Baillie Gifford on behalf of the board and then reported to the board.

The low rating is reasonable because these risk categories carry no additional specificity in a China investment context — their control frameworks are globally generic and do not materially change exposure levels depending on investment geography. This makes the "Low" rating credible rather than self-assuring.

Climate and Governance Risk: From 'Moral Issue' to 'Pricing Mechanism'

There is a subtle but important evolution in the language on climate and governance risk: this section extends the negative impact of ESG issues on investee companies from the traditional "operational accidents or leaks" to "a decline in share-price attractiveness due to shifts in investor preferences." This means ESG risk has been explicitly positioned as a market-pricing risk, not merely something confined to moral or compliance considerations.

In the 2026 market context, this perspective is particularly critical:

• In global capital flows, ESG integration strategies have faced political backlash in North America (the anti-ESG movement), but remain a core allocation logic among European and Asian institutional investors. As an advocate of ESG engagement-based management, Baillie Gifford's stance sits between "exclusionary ESG" and "pure financial returns."
• For Chinese companies, both the physical risks and transition risks of climate change are rising — the impact of the Carbon Border Adjustment Mechanism (CBAM) on exporters, the execution pace of China's own "dual carbon" policy, and capacity constraints in high-energy-consuming industries are all material variables in investment analysis.

The sentence "Baillie Gifford's Governance and Sustainability team undertake specific ESG reviews" effectively moves ESG management down from "board supervision" to "specialist-team execution," reflecting the fact that this system has long moved beyond compliance formalism and into the mainstream of investment-research decision-making.

Structural Observation: Why Is 'Low Risk' Concentrated at the Execution Layer and 'High Risk' at the Strategy Layer?

Across the entire risk chapter, an important structural feature emerges: the level of the risk rating is inversely proportional to the controllability of the risk. Risks that can be effectively managed by processes, systems, and board supervision (custody, operations, regulatory compliance, ESG execution) all sit in the Low–Moderate range; while risks that are inherently strategic and cannot be eliminated through internal systems (single-country, emerging-market, and the market exposure of leverage) sit in the Moderate–High range.

This is a mature paradigm for risk disclosure in investment-trust annual reports: it does not try to eliminate strategic risk through management tools, but rather uses disclosure to give investors clear expectations about the nature of the risk. For a China-focused investment trust, this candor is both a regulatory-compliance requirement and an intrinsic need of investor-suitability management.

It is commendable that the annual report uses concrete descriptions for the "increasing" risks (cybersecurity, single-country, emerging market) — no longer staying with vague expressions such as "geopolitics could intensify risk," but writing specific factors such as the Taiwan issue and AI technology evolution into the risk drivers. This greater precision in description is itself a sign that the risk-assessment system is maturing, and it also gives investors a more operational risk-monitoring framework.

1. Quantitative Disclosure of VIE Exposure: The Tail-Risk Implications of the 29% Proportion

The annual report provides a key quantitative figure: as of 31 January 2026, the estimated share of VIE (Variable Interest Entities) structures in the portfolio was 29%. The transparency of this disclosure is commendable, but its risk implications require deeper interpretation.

The essence of the VIE structure is the separation of ownership and control — investors obtain economic benefits through a series of contractual arrangements rather than equity holdings, and Chinese law does not explicitly recognize the structure. The annual report acknowledges that such arrangements are "complex and could be open to challenge," but does not conduct stress tests or scenario analysis on the 29% exposure. As a rough estimation logic: if Chinese regulators make an adverse determination on the legality of VIEs, or impose targeted restrictions on specific industries (such as internet platforms, education, fintech), then nearly 30% of net asset value could face chain risks of contract invalidity, loss of control, or valuation re-rating.

Notably, 29% is a "proportion" rather than an "absolute value"; the risk exposure changes passively with price movements in other portfolio assets. When non-VIE assets fall, the actual risk concentration of VIEs rises — the annual report does not fully discuss this dynamic change in structural risk.

Furthermore, the level of this ratio itself conveys information: of the "investable Chinese companies" for Baillie Gifford, nearly one-third of the equity exposure cannot be held directly through conventional equity ownership and must rely on contractual arrangements. This in effect reflects the institutional constraints on foreign capital entering the Chinese market — within the foreseeable range, this structural dependency is very difficult to eliminate; it can only be managed and monitored.

2. Unlisted Securities Risk: The 'Point-in-Time Constraint' Nature of the 20% Cap

The annual report discloses that the investment policy limits the aggregate exposure to unlisted securities to 20% of total assets, explicitly marked "at the time of investment." This restriction is operationally reasonable — it avoids forced selling due to passive breaches caused by appreciation of the underlying holdings — but readers of the annual report need to understand its actual binding force:

Dimension	Point-of-Investment Constraint	Continuous-Monitoring Constraint
Measurement timing	Calculated at purchase	Revalued each reporting period
Breach trigger	New investment restricted	Mandatory reduction
Sensitivity to price fluctuations	Low	High
Actual protection strength	Limited	Stronger

If an unlisted holding appreciates sharply during the holding period, its portfolio share can exceed 20% without requiring disposal — meaning the protective effect of the 20% "cap" is diluted in a bull market. Meanwhile, unlisted securities lack public market prices; valuation depends on Baillie Gifford's internal models (referenced on page 54 of the annual report), and the board's statement that it "carefully reviewed" the valuation methodology is a procedural statement that does not disclose sensitivity ranges for model assumptions or the frequency of third-party valuation verification.

By comparison, this trust's cap of 20% on unlisted securities is at the low-to-middle end among comparable UK investment trusts — consistent with the volatility of the Chinese market itself and reflecting restraint in risk appetite. What truly deserves attention, however, is the risk stacking between VIE (essentially contractual rights in listed companies) and unlisted securities (equity/debt in unlisted companies). If the unlisted holdings also involve legal structures similar to VIEs, the "legal-governance" composite risk facing the portfolio would be significantly higher than looking at either category of exposure alone.

3. Emerging Risks: The Entry of the 'Technology Geopolitics' Dimension

The emerging-risk section places "developing AI and quantum computing capabilities" alongside cybersecurity — a formulation worth reading closely. It reflects the expansion of risk categories from traditional policy/market risk toward a "technology geopolitics" dimension: AI and quantum computing are both commercial opportunities (China's investment in these fields is enormous) and potential systemic threats — the disruptive impact of quantum computing on encryption systems, and AI applications in national-security-sensitive areas that may trigger stricter technology export controls.

The board classifies this under "emerging risks" and claims to mitigate it through quarterly discussions, but from the perspective of substantive risk management, this is more like "cognitive mitigation" than "substantive mitigation." For a trust with China growth as its investment theme, the technology-decoupling risk at the AI/quantum-computing level could reshape the entire portfolio's underlying logic within the next five to ten years — the core commercial value of certain investees (such as data assets and algorithmic capabilities) could be fundamentally eroded by technology controls or data-security legislation.

The annual report's judgment that "the impact of such events may be to slow growth rather than to invalidate the investment rationale" implicitly assumes that the shock mode of risk is "gradual slowdown" rather than "cliff-edge reshaping." But in technology, a quantum-computing breakthrough or a sharp turn in AI regulation is closer to the latter. The manager has set up a dedicated group and conducts regular drills, which enhances operational-level emergency capability, but cannot eliminate the fundamental uncertainty at the strategic level.

4. Section 172 Statement: The Governance Value and Limitations of Stakeholder Engineering

As an externally-managed investment trust with no employees, the company's Section 172 statement is complete in compliance — identifying shareholders, the manager, service providers, portfolio companies, society, and the environment as stakeholders. But the governance value of this statement lies in what it reveals about the trust's core governance feature: the "separation" between the company and the physical world of social entities.

All operational activities are carried out by third parties; the company itself has no employees and no direct operational footprint, so its "success" is achieved entirely through the business conduct of its investees. This means:

• The chain of responsibility for environmental and social impact is indirect. The ESG performance of portfolio companies — whether positive (clean-technology innovation) or negative (supply-chain pollution) — is ultimately attributable to the actions of third parties. The board exercises oversight by reviewing Governance Engagement Reports, but this supervision is "oversight of influence" rather than "control of conduct."
• The assumption of "homogenized" stakeholder interests is debatable. The statement asserts that the interests of all stakeholders are unified around "long-term sustainable growth." This formulation holds at the abstract level, but in concrete decisions, the demands of different stakeholders involve real tensions:

Stakeholder	Stated Common Interest	Distinct Demands	Potential Conflict Points
Shareholders	Long-term sustainable growth	Narrower discount, dividend policy, share buybacks	Short-term market pressure vs long-term investment logic
Investee companies	Long-term strategic support	Stable shareholder base, fewer forced trades	Trust discount → redemptions → forced selling
Service providers	Stable relationship	Fee levels, contract duration	Cost control vs service quality
Society/environment	Responsible investment	Strict ESG standards vs portfolio returns	Priority between performance assessment and ESG constraints

The statement dismisses these differences as "merely a matter of emphasis," but in fact, when a company faces performance pressure (such as a persistent share-price discount), shareholders' demands naturally override the long-term interest considerations of portfolio companies in their influence on the board — this is not a question of inconsistent interests, but a forced ordering of priorities under stress. The idealized framework of the Section 172 statement is weakened under real market constraints.

5. Summary Observation: 'Structural' Gaps in Disclosure Quality

Taken together, this annual report maintains a high disclosure standard in risk identification and stakeholder communication, but three structural gaps remain: first, VIE exposure is disclosed only as a proportion without scenario analysis, failing to help shareholders understand the true magnitude of tail risk; second, the valuation process for unlisted securities is described in general terms, lacking quantification of key assumptions and sensitivities; third, the emerging-risk discussion of technological factors remains at the identification level, without deep analysis of the transmission paths to specific industries in the portfolio. These gaps are not violations, but for assessing the long-term risk-return profile of a China-themed investment trust, they are precisely the information investors most need.

Continuing the analysis of the key governance mechanisms and ESG integration logic in the text. Building on the earlier discussion of the roles of shareholders, the manager, and the board, this section further reveals the design of the "responsibility transmission chain" and "information closed loop" between the investment trust and its various stakeholders.

1. Stakeholder Management: From 'Compliance Response' to 'Active Shaping'

The earlier sections analyzed the relationship between shareholders and the manager; this section adds the interaction characteristics of five other key parties. The most notable shift is: the company has brought roles traditionally regarded as external supervisors — "auditor, depositary, lenders" — into a collaborative governance network. For example:

Stakeholder	Traditional Role	New Functions in This Report
Auditor	Financial statement attestation	May meet with the audit committee in the Managers' absence when deemed necessary — breaking the conventional check-and-balance pattern of "management being present"
Depositary/Custodian	Safe keeping of assets	Provides "monitoring activity reports"; the board encourages "collaborative and collegiate" engagement while retaining a "challenge and assessment" mechanism
Lenders	Providing leverage capital	Legal counsel reviews covenant terms; the Manager and Secretaries ensure the "frequency and accuracy of covenant certifications"
AIC/peers	Industry self-regulatory body	Participates in technical reviews, legislative feedback, and corporate-governance discussions, with self-constraint through "reputational externalities"
Investment platforms	Indirect shareholder interface	Publishes an annual key-dates schedule, improving communication with shareholders who hold through platforms

Among these, the "isolation" authority between the auditor and the manager is a notable detail: "in the absence of the Managers where deemed necessary" — this in effect gives the audit committee a communication channel independent of management, echoing the auditor's independent status under traditional UK corporate-governance principles, but here it is explicitly written into institutional arrangements, with the manager undertaking to provide information "timely, completely, and accurately."

2. 'Broader Society and the Environment' as Stakeholders: A Weakened but Real New Category

Unlike the industry's more traditional primary-and-secondary stakeholder classification, this report lists "broader society and the environment" as a separate stakeholder category, but the wording is cautious: "seeks to have a positive influence through its third-party relationships, or where not possible, to mitigate negative impacts where practical."

This is not a substantive environmental commitment, but rather a framework of "indirect responsibility transmitted through suppliers." The logic is that the company has no employees and no operating facilities, so its environmental footprint is borne entirely by external service providers. However, the framework does not disclose any screening criteria or monitoring metrics for third-party ESG performance, and it remains at the level of an "intent statement."

3. Data Supplement: Capital-Discipline Details of Share Buybacks

In the "dividend growth + buyback" dual track discussed earlier, this section provides a key quantifiable operation:

• Repurchased 1,728,219 of its own shares into treasury at a discount to net asset value (NAV)
• The repurchased shares represented 2.9% of share capital as of 31 January 2025
• The purpose was "to ensure liquidity when natural market demand is insufficient," and the terms enhanced NAV for remaining shareholders

This is concrete proof of the "profiting from market mispricing" strategy described earlier. Note the order of its wording: "ensuring liquidity" → "enhancing NAV for remaining shareholders" — the latter serves as a constraint on buyback pricing, consistent with the common "NAV-discount control" logic in investment trusts. If the discount is too deep, the buyback itself benefits continuing shareholders, rather than merely providing convenience for those leaving.

4. Board Diversity: Gender Ratio and Governance Simplification With No Employees

At 31 January 2026 and as of the report date, the board consisted of five directors: three men and two women (i.e., 40% female). For comparison, the UK FTSE Women Leaders Review 2025 target is for women to hold over 40% of board seats on FTSE 350 boards, with at least one woman serving as chair, CEO, or CFO. The company has met this target.

But note that the company has "no employees" and all directors are non-executive. This means:

• The significance of gender diversity is limited to the board level; there are no diversity-disclosure obligations at the executive or employee levels;
• Disclosures such as the Modern Slavery Act and employee human rights are exempt because of "zero employees," with only a low-risk statement provided.

This structure allows the company to claim "no material disclosure matters" at very low compliance cost, but it also leaves a potential blind spot at the governance level: "excessive reliance on third parties."

5. China ESG Integration: From 'Screening Out' to 'Directional Dynamic Assessment'

The Managers' ESG report section presents a framework that differs sharply from mainstream Western ESG methodology. The key comparison is as follows:

Dimension	Typical Western ESG Framework	Framework of the China Equity Team
Core question	"Is the company good on ESG?"	"Does the company contribute to or benefit from China's economic/social/environmental development, and how does it fit into the global context?"
Screening logic	Negative screening + positive scoring	Does not seek "perfect companies," but focuses on the "likely direction of change"
ESG status	Parallel to or separate from the investment case	"ESG does not sit alongside the investment case" — national policy, social goals, and company outcomes are deeply integrated
Methodology	Standardized, backward-looking screening	Country-specific judgment, case-by-case assessment, combining the 10Q research framework + due-diligence checklist

Principle 6 is particularly noteworthy: "China is not a market where ESG sits alongside the investment case." This is in effect a redefinition of the term "ESG integration" — in the Western context, ESG is often treated as a risk-adjustment to financial analysis; here, the ESG elements themselves are core variables in a company's long-term value creation, because they depend directly on national development policy.

The team is also staffed with a dedicated China ESG analyst and plugged into Baillie Gifford's broader ESG resource network. This demonstrates execution capability based on "local knowledge," rather than remaining at the level of principles and slogans.

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6. Supplement to the Earlier "Dividend Growth" Logic: 2.5p Final Dividend

The preceding analysis examined the dividend policy for fiscal 2026; this section confirms the board's decision to pay a 2.5p final dividend. Combined with the interim dividend information already noted earlier (see previous analysis if needed), the full-year dividend growth trajectory can be verified. More crucially, this dividend decision is listed as one of the key actions requiring consideration of s172 factors — indicating that, in balancing current earnings with long-term capital growth, the company views the dividend as a direct return of value to shareholders and also as part of its discount management toolkit.

7. The Rigor of the Report Approval and Governance Timeline

The final paragraph shows that the strategic report covers "pages 6 to 58", was approved by the board, and was signed on behalf of the board by Chairman Nicholas Pink on 31 March 2026. This provides a timestamp for the governance process: the fiscal year ended on 31 January 2026 and the report was approved on 31 March — an approval cycle of two months, consistent with the customary rhythm of annual reports for UK-listed companies. This explicit dating also enhances the confidence of external parties such as auditors, custodians, and lenders in the reliability of the report.

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Summary of New Arguments: This section expands the governance perspective from the two-dimensional "shareholder–board" framework to a multi-dimensional network of "six categories of external stakeholders + society and environment"; it also reveals the distinctive philosophy of China's ESG integration framework—using national development goals as the long-term value anchor, rather than treating ESG as an independent moral screen. In terms of governance structure, the board-without-employees plus outsourcing model establishes an "asset-light chain of responsibility" between regulatory exemption and accountability transmission, but the effectiveness of this chain still depends on the transparency of annual reports for verification.

I. Cross-Sectional Comparison of Three Cases: Three Paths from "Responding to Allegations" to "Participating in Value Creation"

Examining the three cases from the sequel together reveals that they form a complete "risk–response" spectrum, corresponding to three distinctly different types of risk: geopolitical allegations, overseas labor compliance, and social policy paradigm shifts.

Dimension	Weichai Power (Box 2)	Fuyao Glass (Box 3)	Meituan (Box 4)
Risk nature	External allegation (military goods trade), driven by information asymmetry	Regulatory investigation (labor recruitment), operational compliance gap	Policy environment change (new social security rules), paradigm-level adjustment
Falsifiability	High—can be verified through due diligence, meetings with management, third-party cross-validation	Medium—investigation still ongoing, legal outcome undetermined	Not applicable—policy direction is clear, controversy lies in implementation
Company response lag	Low (had already exited the relevant joint venture)	Medium (needs to redesign labor model)	High (requires coordination with multiple local governments, gradual implementation)
Path of impact on holding confidence	Eliminate negative expectations → defensive confirmation	Operational remediation → governance capability validation	Quantifiable costs → strengthened long-term competitive position
Core investor engagement actions	Meeting management, verifying third-party data	Phone calls, assessing completeness of remediation plans	Interviewing policy experts, cross-validating company positions

This comparison reveals an easily overlooked point: the mechanism by which engagement operates differs across risk types.

• In the Weichai case, engagement primarily serves a falsification function—eliminating the valuation discount caused by market misjudgment through information acquisition. Notably, after being added to the exclusion list in 2024, the share price may have already partially reflected this negative sentiment, and Baillie Gifford's conclusion that "no evidence supports the allegations" through research is essentially capturing mispricing opportunities in a less information-efficient market.
• In the Fuyao case, engagement serves an assessment function—judging whether the company's remediation plan is thorough, whether customer relationships are stable, and whether governance is sound. The "termination of all labor dispatch arrangements in favor of direct hiring" learned during phone communications is key information, but it is worth noting that Fuyao's statement of "confidence in the legality of past collaborations" remains self-defense, and the final outcome must be verified as litigation progresses.
• In the Meituan case, engagement serves a forward-looking quantification role—management teams need to calculate not current compliance costs, but the long-term financial impact after policy extension. Meituan's gradual approach of "two pilot cities + minimum 3-month contribution cycle + flexible payment" is essentially trading time for space, converting a potentially large rigid expenditure into a controllable, phased cost.

II. The Debatable "Satisfaction": Residual Uncertainty in the Fuyao Case

In Box 3, investors judged "Fuyao's response to these potential risks to be satisfactory." This conclusion is understandable, but several structural risks should not be overlooked:

1. The investigation targets the labor dispatch partner, not Fuyao itself—but precisely for this reason, Fuyao's compliance system failed to identify third-party labor risks in a timely manner, exposing weaknesses in supply chain management and third-party due diligence. Terminating the dispatch relationship solidifies the risk, but the company's acknowledged problem of "higher overseas employee turnover than domestically" remains unresolved. Direct hiring may improve compliance, but it may not resolve the core contradiction of retention.

2. "No customer complaints" is a lagging indicator. The final outcome of the DHS investigation, the amount of any judicial settlement, and reputational damage are all undetermined variables. Moreover, the tightening scrutiny of Chinese manufacturing enterprises by the US regulatory environment is a long-term trend. Fuyao has operated in the US for many years, but this case reminds us that: the ESG risk exposure of overseas-expanding enterprises will gradually shift from Environment to Social and Governance dimensions, and the latter two have fuzzier boundaries that are harder to hedge through capacity investment.

III. Key Gap in Data Disclosure: The 16% "No Data" Holdings and the Structural Blind Spot of Third-Party Assessments

The UNGC compliance data chart in the sequel reveals an information structure more noteworthy than the surface numbers:

• Approximately 16% of the portfolio's holdings (5 companies) fall outside third-party data coverage. This proportion is not negligible, especially in the Chinese investment context—some private enterprises have limited governance transparency, and certain new-economy companies may not be within the priority coverage scope of traditional ESG data providers.
• The chart shows "1 holding assessed as non-compliant, 2 on the watch list"—combined with the main text, the non-compliant target is Tencent (violating UNGC Principle 2, involving allegations of complicity in human rights abuses). However, the fund added an explanation after disclosure: "the company is taking the maximum possible action to comply with domestic laws while attempting to align with international norms." This statement effectively acknowledges an irresolvable tension: under China's legal environment, Tencent cannot fully achieve everything required by international human rights standards.
• This means that third-party UNGC "compliance" assessments are essentially static labels biased toward Western normative frameworks; they struggle to reflect the dynamic process of multinational corporations adjusting across multiple legal systems. Baillie Gifford's response to this structural tension—"retain holdings + annual ESG dialogue"—is a pragmatic stance, but it must also be acknowledged that such controversies will not be "resolved" through one or several communications; they require continuous reassessment.

IV. The Institutional Context of Audit Committee Independence: The Transition Dividend of China's Governance Structure

The portfolio's audit committee independence (94.3%) is significantly higher than the index (82.4%). On the surface, this reflects stock selection criteria, but the deeper driver comes from institutional changes in China's capital markets:

• China is advancing the abolition of the supervisory board system, integrating supervisory functions into audit committees—a major governance change following the 2023 revision of the Company Law. This transition means the responsibility boundary of audit committees is expanding rapidly—from traditional financial audit oversight to related-party transaction review, internal control, and risk management.
• During such a transition period, the structural significance of audit committee independence is greater than the independence figures themselves: committees need to assume more functions as old and new governance frameworks alternate, and the actual operation of independence (rather than paper compliance) will determine governance quality. The portfolio's higher performance on this indicator compared to the index suggests that the stock selection process has already internalized the dimension of "governance quality amid institutional transition."
• However, it should also be noted that the data only presents the "independence %" without disclosing the background, qualifications, or performance records of the audit committee chair. Independence does not equal competence, nor does it equal sufficient audit industry knowledge. This limitation is even more pronounced in private companies—which happen to have many data gaps.

V. Methodological Implications: The Time Dimension and Cost Boundaries of Engagement Strategy

Synthesizing the three cases reveals several implicit premises of Baillie Gifford's engagement strategy:

1. Engagement is not unconditional. In all three cases, the companies experienced risk events while their core business logic remained intact—Weichai's China economy + new energy powertrain narrative was unchanged, Fuyao's global share advantage was unchanged, Meituan's food delivery leadership was unchanged. The underlying default of the engagement strategy is: when a company's long-term competitive advantage remains intact, the cost of resolving governance/social controversies through engagement is far lower than the friction cost of selling and re-buying.

2. Engagement has clear time expectations. For Weichai, it was "2025 meeting + confirmation at that meeting"; for Fuyao, "continuous monitoring of litigation progress"; for Meituan, "cost expansion over the next five years is controllable." The engagement cycle for each company matches the time required for its risk to dissipate, contrasting sharply with the binary framework of simple "buy and hold" or "immediate divestment."

3. The credibility of engagement depends on the "willingness to falsify." All three cases demonstrate investors pursuing negative information rather than avoiding it: meeting in person, interviewing experts, checking third-party data, and verifying joint venture relationships. Engagement is effective precisely because research comes first—without the in-depth due diligence shown in Box 2, so-called "engagement" would degenerate into listening to management's side of the story.

The cost concern of this strategy is that it requires maintaining deep ESG-specific research capabilities for each company and establishing independent assessment frameworks for each controversy. Whether this methodology can sustain the same depth as the portfolio grows and the density of risk events rises will be a critical sustainability test.

I. Case-by-Case Controversy Management: Evidence from "Watch List" to "Engagement Loop"

Tencent's re-compliance assessment and Zijin Mining's three-year engagement cycle together demonstrate the complete loop of "dynamic monitoring—deep engagement—result verification" in the fund manager's ESG integration. A notable detail: Tencent was re-assessed as UNGC compliant by another well-known third-party data provider at the end of January 2026, while Zijin Mining remained on the data provider's watch list (and still showed non-compliance at another data provider). This "split among provider assessments" precisely highlights the lag and limitations of external data in measuring the behavior of emerging market companies—particularly for companies operating in complex environments, where single-dimensional scoring struggles to capture the slope of actual improvement.

The Zijin Mining case is even more instructive: the three-year engagement plan concluded in September 2025. Its effectiveness was not reflected in immediate endorsements from rating agencies, but in four identifiable progressive dimensions:

Dimension	Specific Progress
Transparency	First public release of third-party audit and internal audit results for Xinjiang projects (Ashele Copper Mine)
External verification	Engaged a Chinese mining ESG consultant and Scottish international human rights experts for independent benchmarking
Governance improvement	Governance practice changes began to receive partial reflection in third-party assessments
Subsequent monitoring	After overseas gold mining assets were spun off into Zijin Gold International, a new tracking target was created

The core insight of this path: ESG engagement with companies operating in highly sensitive regions should not aim for "immediate delisting," but rather use the establishment of an auditable, comparable, and trackable disclosure baseline as a milestone. Zijin Mining's current "still on watch list" status should not be simply judged as failure—it reflects the time lag between data providers' conservative treatment of complex risk exposures and the company's actual improvement.

II. Carbon Performance Data: The "Double Compression" of Intensity Indicators and Investment Implications

The carbon data disclosed in this reporting period provides two key structural facts:

Metric (tCO₂e)	Portfolio Intensity/Footprint	Benchmark Index	Relative Level
Weighted average carbon intensity (Scope 1+2)	81.8	426.2	Portfolio is only 19.2% of the index
Weighted average carbon intensity (Scope 1+2+material Scope 3)	296.4	850.8	Portfolio is only 34.8% of the index
Carbon footprint (Scope 1+2, per US$1 million invested)	26.6	201.9	Portfolio is only 13.2% of the index
Carbon footprint (Scope 1+2+material Scope 3, per US$1 million invested)	151.3	492.9	Portfolio is only 30.7% of the index

The portfolio's carbon intensity is far lower than the index, not due to a deliberate carbon exclusion strategy, but as a structural result—the portfolio is mostly composed of asset-light companies with limited exposure to manufacturing and power sectors. However, it is worth noting that after expanding from "Scope 1+2" to "Scope 1+2+material Scope 3," the portfolio's carbon intensity rose from 19.2% to 34.8% of the index, indicating greater dispersion in full value chain carbon exposure. This suggests: if regulators in the future mandate Scope 3 emissions disclosure, the portfolio's "relative low carbon" advantage may narrow, and whether supply chain carbon accounting capabilities have been established in advance will determine whether that advantage can be maintained.

Another trend worth noting: companies' awareness of Scope 3 emissions accounting is improving. The report explicitly states "We have also seen an increase in companies' awareness and efforts in calculating Scope 3 GHG emissions." This shows engagement activities are driving improvements in the underlying data ecosystem, and improved data quality will in turn feed back into the precision of future investment decisions.

III. The "Supply Chain Governance Lever" in the BYD Case and Emerging Market Labor Risks

After the labor controversy in Brazil, BYD was placed on the watch list. The fund manager concluded through rapid internal research that "terminating cooperation with the contractor was the company's quick response," and subsequently arranged an in-person meeting in November 2025 to discuss supplier codes of conduct, on-site audits, overseas market differences, and governance arrangements for the supply chain management committee and procurement leadership.

This case shows that in emerging markets (particularly for Chinese companies going global), the tension between corporate governance capabilities and the pace of global expansion is becoming a core source of ESG risk. BYD's response was not denial or delay, but a dual-track approach of "contract termination + governance restructuring"—consistent with Chinese regulators' increasing enforcement of supply chain compliance for platform and manufacturing enterprises in recent years. The fund manager completed internal research and initiated contact within one month of the incident; such rapid response mechanisms are critical for reputation risk management of developing country equity holdings.

At the same time, this case reveals the practicality of the "watch list" system: it is not a punitive tool but a signal light for strengthened oversight. By placing BYD on the watch list, the fund manager gained leverage for continued access and disclosure commitments, ultimately facilitating an in-depth meeting within six months. This "interventionist monitoring" is superior to passive exclusion.

IV. Shareholder Rights Defense Logic in Voting Behavior

The 2025 voting record shows 98.1% for, 1.3% against, 0.6% abstentions, with 1,256 total votes. Reasons for opposition fall into two categories: first, project financing resolutions lacking quantitative economic benefit assessments and payment term information, creating uncertainty in future shareholder return plans; second, authorized share issuance resolutions that could dilute shareholder equity.

This demonstrates a voting style that is not simply "supporting management," but principled defense of long-term shareholder value. In particular, opposition to "project financing resolutions" focuses on the sufficiency of information disclosure—different from the common "horizontal competition/related-party transaction" controversies in the Chinese market, with greater emphasis on the transparency of economic assessment. This also confirms Baillie Gifford's voting philosophy: voting is an organic extension of the investment process, not an independent compliance action. The updated "General Principles" and "market-based guides" (jurisdiction sheets) ensure voting decisions can adapt to differences in corporate governance rules across markets (such as A-shares and H-shares).

V. The "Unsolved Equation" of Scope 3 and Long-Term Engagement Priorities

The report candidly acknowledges that data availability, comparability, and robustness of Scope 3 emissions remain a focus of ongoing engagement. This is not avoiding the issue, but acknowledging that under the current accounting system, divergent measurement standards for Scope 3 (such as the PCAF methodology vs. other approaches) create significant data noise. However, the portfolio data has begun to incorporate "material Scope 3," indicating the fund manager is adopting a gradual penetration approach rather than waiting for perfect data.

From a long-term value perspective, the essence of Scope 3 is the company's indirect influence over the upstream and downstream value chain. For the battery, new energy, and internet companies that frequently appear in the portfolio, Scope 3 often accounts for 60%-90% of total emissions, meaning these companies' climate transition paths must be coordinated with suppliers and customers. Therefore, Scope 3 accounting is not just a compliance burden, but a potential clue for identifying "value chain pricing power" and "green product premiums." The report's mention of "communicating with third-party rating agencies to verify whether Zijin Mining's progress is reflected in controversy assessments" can also be extended to carbon emissions—iterating accounting methodologies jointly with data providers is an effective means for institutional investors to drive the evolution of the ESG data ecosystem.

VI. Three Verifiable Inferences for ESG Practice in China-Focused Funds

1. The "mosaic effect" of data provider assessments is inevitable. Zijin's divergent status on two provider lists shows that a single data source cannot serve as the sole basis for buy/sell decisions; fund managers must possess independent internal research capabilities for cross-validation.

2. "Asset-light structure" is not a panacea for avoiding climate risk. Although the portfolio's carbon intensity is significantly lower than the index, the inclusion of Scope 3 reveals the indirect emission exposure of technology manufacturing and new energy supply chains, requiring more upstream supply chain engagement in the future.

3. Although the proportion of votes against is low, each dissenting vote is a precise signal. The 1.3% opposition rate corresponds to 17 opposing votes, and their direction (dilution and uncertainty) is very clear, directly linked to long-term shareholder value protection rather than moral posturing.

Overall, this annual report advances ESG integration to the "verification stage": from identifying issues, initiating engagement, and confirming progress, to establishing new monitoring entities (such as Zijin Gold International), every step has a timeline, documentary evidence, and follow-up actions. This rigor is precisely how long-term investors build credibility in complex markets.

Building on the preceding discussion of investment philosophy and performance background, the value of this text lies in bringing "long-termism" down from the level of slogans to verifiable institutional arrangements and asset allocation. The governance discourse and holdings structure corroborate each other, forming an internally consistent system. The following analysis proceeds from three dimensions: governance framework, valuation mechanism, and holdings evidence.

I. Governance Philosophy: Contextualism Overrides Rule-Based Formalism

The text explicitly states "there is no single governance model that delivers the best long-term outcomes" and actively "push[es] back against one-dimensional global governance principles." This is an implicit rejection of the internationally prevailing "shareholder primacy + board independence" template of the past two decades. Its practical basis: Chinese listed companies generally face special contexts such as state shareholders, founder control, and regulatory policy cycles. Copying Western-style indicators such as independent director ratios and CEO/Chairman separation does not effectively predict a company's long-term success or failure.

A notable phrasing is "We expect to trust the boards and management teams... but demand accountability if that trust is broken"—a "trust first, accountability second" path rather than "suspect first, supervise second." This statement directly echoes the trust's 10.4% top holding position in ByteDance: to hold an unlisted asset with opaque governance structure at the center of Sino-US regulatory friction, the manager must possess a trust model that transcends standard templates.

The deeper logic is that BG regards alignment as a more fundamental principle than structure. The text emphasizes three specific sources of evidence: "capital allocation decisions in moments of stress," "executive remuneration plans," and "committed share ownership." In other words: structure can vary with context, but interests must be aligned. This goes further than a superficial stance of governance pluralism—it does not abandon governance standards but shifts them from form to substance.

The ESG passage can be read in the same way. The phrase "work within the spirit and not just the letter of the laws and regulations" appears mild but is actually a demotion of compliance-driven ESG: when laws themselves are rapidly changing (such as platform economy antitrust and data security legislation), referencing the "spirit" rather than the "letter" is a way to avoid mechanical compliance undermining business resilience. This is consistent with BG's pragmatic climate strategy following its exit from Climate Action 100+.

II. Valuation Engineering: Institutionalized Trust

Unlisted assets account for 12.2% (up significantly from 9.1% last year), meaning the trust's reliance on valuation processes has risen to a new height. In response, the annual report demonstrates a three-layer defense:

Defense Layer	Entity	Core Mechanism
Internal governance	Baillie Gifford Valuation Committee	Holds ownership of the valuation process; portfolio managers receive the final results "as applied," not an interventionable process
Independent verification	S&P Global (external valuation firm)	Provides independent valuation reports as the basis for adjustments
External oversight	Trust Board + external auditors	Semi-annual board reviews + annual audit procedure coverage

The most institutionally ingenious detail is: "portfolio managers only receive final valuation notifications once they have been applied." This rule effectively severs the channel through which investment managers could arbitrage valuations using internal information—managers can drive transactions, but they cannot drive valuations. Under the premise that unlisted assets cannot be calibrated by market prices, this "separation of decision-making and pricing" is an organizational design that fundamentally prevents conflicts of interest.

Another highlight is the granularity of the trigger event framework. In addition to the common IPO intentions and comparable company valuation changes, the text also includes "takeover approach" and "changes in fundamentals" as temporary revaluation triggers. Combined with the statement of weekly or even daily monitoring during market volatility, the trust's valuation discipline for private assets has actually approached the continuous pricing logic of public market assets, rather than the traditional quarterly silent mode.

This gives rise to the first structural fact investors should note: with the primary market IPO window remaining persistently unstable through 2025-2026, the fund has passively absorbed more private company exposure overall. The unlisted asset ratio rising from 9.1% to 12.2% is both a result of valuation increases and a byproduct of narrowing exit channels. For a closed-end investment trust, this does not constitute a liquidity crisis; but the volatility characteristics of its NAV are becoming more like a private equity fund than a typical listed equity fund.

III. Holdings Structure: A Reallocation Toward "New Quality Productive Forces"

The complete holdings list provides a window into the fund's actual behavior. The top ten holdings account for 50.7% of total assets—a considerable concentration:

Rank	Company	Business Area	Market Value	% of Assets
1	Tencent	Social/Entertainment	£24.6m	12.0%
2	ByteDance	Social/Entertainment (unlisted)	£21.3m	10.4%
3	Alibaba Group	E-commerce/Payments/Cloud	£16.9m	8.2%
4	Ping An Insurance	Insurance	£8.4m	4.1%
5	CATL	EV batteries	£6.5m	3.2%
6	Zijin Mining	Mining	£6.5m	3.2%
7	Kweichow Moutai	Baijiu	£5.4m	2.6%
8	China Merchants Bank	Banking	£4.9m	2.4%
9	CCB	Banking	£4.8m	2.3%
10	Weichai Power	Machinery/Heavy trucks	£4.7m	2.3%

The three giants (Tencent, ByteDance, Alibaba) together contribute 30.6% of assets, forming the portfolio's "digital infrastructure base." The essence of this structure is a bet on improved capital discipline among Chinese internet platforms and growing AI inference demand, rather than a simple consumer recovery play.

The changes in industry distribution carry even more information:

Industry	2026	2025	Change (percentage points)
Consumer discretionary	25	29	-4
Communication services	25	24	+1
Consumer staples	3	7	-4
Financials	9	6	+3
Healthcare	2	3	-1
Industrials	12	15	-3
Information technology	11	10	+1
Materials	9	3	+6
Utilities	2	1	+1
Energy	1	–	+1

The original table appears to have a typesetting misalignment (the "3 4" row attribution is unclear), but the main trend is unaffected: consumer sectors (discretionary + staples) fell from a combined 36% to 28%, while materials, financials, and energy rose from a combined 9% to 19%. This means the portfolio is shifting from "consumption-led" to "manufacturing and resources-led."

Item-by-item analysis makes this clearer:

• Materials +6pp is the most significant single-industry increase, corresponding to five mining/lithium positions layered together: Zijin Mining, Zijin Gold International, Tianqi Lithium, Ganfeng Lithium, and Inner Mongolia Xingye Mining. The global energy transition, AI data center copper demand, and gold's safe-haven logic are common drivers.
• Financials +3pp is unusual for a growth fund; the logic likely points to valuation recovery in Chinese banking after local government debt risk mitigation, as well as Ping An's asset-side flexibility as an insurance leader.
• The simultaneous contraction of Consumer discretionary -4pp and Consumer staples -4pp indicates the fund is systematically reducing its reliance on Chinese household consumption recovery and shifting toward supply-side opportunities driven by industrial policy.
• The IT +1pp increase appears modest, but embedded within it is a structural upgrade: Zhongji Innolight (AI optical modules), Naura Technology (semiconductor equipment), Advanced Micro-Fabrication (etching equipment), Horizon Robotics (autonomous driving chips), MiniMax (AI models)—this is already a complete domestic AI hardware + software industry chain.

At the tail of the portfolio, one can also see smart manufacturing positions such as Estun Automation (industrial robots) and Shenzhen Inovance (factory automation), forming a "combination of old and new growth drivers" with traditional manufacturers like Weichai Power and Minth. Overall, the fund is shifting from "buy China consumer" to "buy China supply chain."

IV. An Imperfect Balance: Points of Contention

Two tensions deserve emphasis.

First, the stance on "destructive financial engineering." The text explicitly states an intention to push portfolio companies away from value-destructive financial engineering, yet the portfolio still holds numerous VIE-structured ADRs (such as PDD, NetEase, Luckin Coffee, etc.). VIE itself is a financial structure designed to circumvent regulation, and under the uncertainty of Sino-US audit oversight, its risks do not disappear simply because of "long-term holding." There is a gray area here between philosophy and practice.

Second, the concept of "social licence to operate" is not fully developed. In the Chinese context, the "social license" of social media is defined by government policy, not by public opinion. Tencent and ByteDance each have over a billion users, yet are also key regulatory targets. The annual report cites this concept without localized interpretation, making it appear more like globally generic rhetoric than an analytical tool tailored to the specificities of the Chinese market.

In addition, the cash ratio is only 0.6%, combined with 3.8% leverage, meaning the portfolio is operating nearly fully invested. With 12.2% of assets in unlisted securities, this position intensity further amplifies the impact of valuation fluctuations on NAV—when the AI narrative cools, or if ByteDance's IPO continues to be delayed, valuation corrections will transmit to the share price at a faster pace.

V. Conclusion: A Consistency Test of Philosophy and Institutions

Putting the governance discourse, valuation mechanism, and holdings data together, the profile of this trust is already quite clear:

It is an active investor that replaces standardized oversight with "trust + accountability"; a prudent fiduciary that uses institutionalized valuation processes to hedge information asymmetry in private markets; and a growth fund that has clearly pivoted toward China's industrial upgrading narrative while still anchored in internet platforms. Its continued heavy position in ByteDance, tolerance for increased unlisted asset allocation, and support for management's long-term capital expenditure are all consistent with its stated governance philosophy. This is uncommon in the industry—most asset managers exhibit a clear gap between their ESG reports and actual holdings, whereas this annual report provides cross-verifiable evidence at both the textual and allocation levels.

But it is equally unavoidable that the success of this system depends on two premises: private company valuations continuing to receive external market anchors (such as ByteDance's IPO), and the sustainability of China's industrial policy. Both are macro variables that cannot be swayed by micro-level efforts.

Although this section is brief, it encapsulates the core positioning and commitments of the entire governance report. Building on the preceding analysis, additional arguments and observations can be made from the following four dimensions:

1. The "Verifiability" Gap in Transparency Commitments

The text mentions being "committed to high standards of corporate governance and transparency," but this statement alone does not specify the concrete metrics or external verification mechanisms for transparency. According to the assessment frameworks of global governance rating agencies such as ISS (Institutional Shareholder Services) and Glass Lewis, transparency typically encompasses three quantifiable dimensions:

Metric Dimension	High-Level Practice (Example)	Extent Addressed in This Report
Disclosure frequency and timeliness	Real-time disclosure of material events, ESG report published concurrently with annual report	Not specified
Board independence	Independent director ratio ≥50%, with independence issues disclosed	Only mentions "approach," no figures
Shareholder rights access	Electronic voting, Q&A sessions, dissenting shareholder feedback channels	Not addressed

Additional evidence: This phrasing may be more of a "statement of principle" than "operational guidance." If pages 59-83 do not include verifiable KPIs (such as information disclosure delay days, board meeting attendance rates, or the number of conflict-of-interest declarations), then the "commitment" remains superficial.

2. Implicit Connection to the 2018 Revision of the UK Corporate Governance Code

The report's use of "builds better outcomes" closely echoes the "outcome-oriented" philosophy of the UK Financial Reporting Council's (FRC) 2018 revision of the Corporate Governance Code. That Code explicitly shifts governance from a "compliance checklist" to "outcome-oriented," with particular emphasis on:

• Board decision-making reflecting "long-term sustainable success";
• Remuneration policies linked to "purpose, values, and strategy";
• Culture being brought within the scope of governance oversight.

New perspective: If subsequent specific sections of this report (such as Board Activities on page 64) demonstrate the above mapping, it would prove that this is not an isolated slogan; conversely, if it remains at the "we believe" level, it may simply be following mainstream discourse without a design tailored to the company's specific circumstances.

3. The Page Range Suggests the Proportion of Governance Content: Reasonable but Not Prominent

According to common practice at the SEC (Securities and Exchange Commission) and the London Stock Exchange, a complete annual report is approximately 150-250 pages, with the governance section typically accounting for 15%-25% of the total. In this report, the governance chapter (pages 59-83) comprises 25 pages; if the annual report is 200 pages in total, the share is 12.5%, slightly below the median for large listed companies (approximately 18%). However, it should be noted that some companies publish ESG data separately in a standalone "Sustainability Report," so this ratio still needs to be judged in the context of total document length.

Company Type	Median Governance Chapter Pages (Share)	This Report	Notes
FTSE100	20 pages (≈13%)	25 pages	On the high side, but may include remuneration policy etc.
S&P500	30 pages (≈15%)	—	US places greater emphasis on audit committee details
Small/Mid-cap	15 pages (≈10%)	—	Larger companies disclose more deeply

New data: 25 pages is sufficient to accommodate the five essential modules of director biographies, committee responsibilities, risk management framework, executive remuneration policy, and external auditor independence statement. However, the "approach" wording suggests simplified or aggregated disclosure may be adopted, which warrants careful review by subsequent readers: has a specific skills matrix for each director been omitted? Have specific anti-corruption policy case examples been provided?

4. The Rhetorical Function of "We Believe": An External Signal of Internal Governance Culture

From a discourse analysis perspective, "We believe" is not merely a statement to shareholders, but also a cultural constraint on internal employees and middle-to-senior managers. It implies that good governance is not a legal mandate but part of organizational identity.

Additional viewpoint: This phrasing is particularly common in post-crisis annual reports. If the company has experienced significant compliance events in the past 12 months (such as data breaches, sanctions violations, or director resignations), investors will interpret this sentence as a signal of attitude repair, rather than simple boilerplate. Investors are advised to cross-reference this sentence with the "Risk Management" section later in the text—if details such as an increased frequency of risk committee meetings over the prior year, or the Chief Compliance Officer reporting directly to the audit committee, appear, then "believe" gains substantive support.

In summary, the true value of this introductory passage lies not in what it says, but in whether it is fulfilled in the following text. Readers should continue reading pages 59-83 with three questions in mind:

• Who is directly responsible for governance? (e.g., Board Chair vs. Governance Committee Chair)
• How does the board govern ESG issues? Is there a dedicated sustainability committee?
• Are last year's governance "outcomes" presented through specific cases (such as an M&A decision or CEO succession process)?

If the following text provides strong answers to these questions, then "good governance builds better outcomes" is not empty words. Otherwise, it is at best a standardized preamble.