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<p><strong>Your capital is at risk. Past performance is not a guide to future returns. </strong></p>
<p class="MsoNormal"><strong>Sophie Earnshaw:</strong> This quarter for China, we focus on the two elephants in the room, AI and consumers. </p>
<p>First, AI. While the world's spotlight is on the most powerful models in the US and bottlenecks in memory chips, China is quietly building its own AI stack. The debate is moving beyond who has the most competitive models. In China, the more important question is how quickly AI moves into the real economy, as that is where China has advantages. Engineering talent, manufacturing depth, large user bases, lower deployment costs, and fast feedback loops. </p>
<p>We see AI appearing across consumer platforms, enterprise tools, gaming, autonomous driving, and robotics. ByteDance's Dobao shows how quickly AI can become a daily habit when distribution is already there. Tencent and Alibaba are using AI to improve advertising, commerce, and cloud. </p>
<p>At the hardware layer, domestic substitution is gathering pace. The portfolio holds exposure to selected layers within AI infrastructure, GPUs, semiconductor equipment, foundry, and broader compute. We are also actively researching the domestic memory industry, with China's two leading producers, CXMT and YMTC, expected to list in the public market later this year. </p>
<p>Second, the consumer. The headline picture is still mixed. While property remains a drag on spending and confidence, consumers are not absent. Behaviour is changing. Consumption is shifting towards services, travel, experience and entertainment, social discovery and distinctive local brands. During the quarter, we recycled some outperformance from selected semiconductor holdings and added to positions in attractively valued consumer names such as PDD. We also maintained our exposure to companies such as H World, a hotel chain, and Luckin Coffee, China's most popular coffee brand.<br> <br>These are not a bet on a sudden consumption boom. They are the best platforms and brands that can capture more of the consumer wallet as confidence rebuilds. China's household savings are bigger than its entire equity market cap. So a small shift from caution to spending can matter a lot. </p>
<p>In May, the state also rolled out a central five-year plan to support the property sector via city renovation and urban renewal. Although this is not a 2015-style bazooka, we think it likely that businesses in construction and building materials may be past their cyclical lows. We added some exposure here in the past quarter and thereby broadened the range of growth drivers within the portfolio.</p>
<p>Performance over the period was moderate in absolute and relative terms. Top contributors include our exposure to the semiconductor supply chain, for example, optical transceiver producer Zhongji Inner Light, and Naura, a semiconductor equipment company. Top detractors are from our exposure in the energy and mining sector, such as CNOOC, China's largest offshore oil and gas company, and Zijin Gold. Both had performed well and added to performance in the previous quarters.</p>
<p>To summarise, we remain positive. China's recovery since Covid has been uneven, and geopolitics will remain noisy. But beneath that noise, we see real progress. AI moving from experimentation to application, semiconductors becoming a more self-sufficient domestic investment cycle, and structural shifts in consumer behaviour at a large scale continue to create opportunities. Meanwhile, the team is excited by the pace of development and innovation in sectors such as humanoid robotics and drug development.</p>
<p>That is where the portfolio is focused. Businesses with either data and distribution power and clear paths to monetization, or engineering depth with policy tailwinds and massive end demand, or endurable brands that are catering to the evolving needs of China's consumers. We believe these companies have a long runway of growth ahead of them and will be additive to the long-term returns of our clients.</p>
<h3 class="TABLEHEADER1212pt">China</h3>
<p><strong>Annual past performance to 30 June each year (%)</strong></p>
<table border="1" style="border-collapse: collapse; width: 100%; border-width: 0px; height: 74px;">
<tbody>
<tr style="height: 18.5px;">
<td style="border-width: 1px 1px 2px; border-style: solid; border-color: rgb(204, 204, 204) rgb(204, 204, 204) rgb(0, 0, 0); border-image: initial; padding: 10px; height: 18.5px;"> </td>
<td style="border-width: 1px 1px 2px; border-style: solid; border-color: rgb(204, 204, 204) rgb(204, 204, 204) rgb(0, 0, 0); border-image: initial; padding: 10px; height: 18.5px;"><strong>2022</strong></td>
<td style="border-width: 1px 1px 2px; border-style: solid; border-color: rgb(204, 204, 204) rgb(204, 204, 204) rgb(0, 0, 0); border-image: initial; padding: 10px; height: 18.5px;"><strong>2023</strong></td>
<td style="border-width: 1px 1px 2px; border-style: solid; border-color: rgb(204, 204, 204) rgb(204, 204, 204) rgb(0, 0, 0); border-image: initial; padding: 10px; height: 18.5px;"><strong>2024</strong></td>
<td style="border-width: 1px 1px 2px; border-style: solid; border-color: rgb(204, 204, 204) rgb(204, 204, 204) rgb(0, 0, 0); border-image: initial; padding: 10px; height: 18.5px;"><strong>2025</strong></td>
<td style="border-width: 1px 1px 2px; border-style: solid; border-color: rgb(204, 204, 204) rgb(204, 204, 204) rgb(0, 0, 0); border-image: initial; padding: 10px; height: 18.5px;"><strong>2026</strong></td>
</tr>
<tr style="height: 18.5px;">
<td style="border: 1px solid rgb(204, 204, 204); padding: 10px; height: 18.5px;">China Composite (Gross)</td>
<td style="border: 1px solid rgb(204, 204, 204); padding: 10px; height: 18.5px;">-34.5</td>
<td style="border: 1px solid rgb(204, 204, 204); padding: 10px; height: 18.5px;">-23.5</td>
<td style="border: 1px solid rgb(204, 204, 204); padding: 10px; height: 18.5px;">-10.0</td>
<td style="border: 1px solid rgb(204, 204, 204); padding: 10px; height: 18.5px;">30.6</td>
<td style="border: 1px solid rgb(204, 204, 204); padding: 10px; height: 18.5px;">16.2</td>
</tr>
<tr style="height: 18.5px;">
<td style="border: 1px solid rgb(204, 204, 204); padding: 10px; height: 18.5px;">China Composite (net)</td>
<td style="border: 1px solid rgb(204, 204, 204); padding: 10px; height: 18.5px;">-35.0</td>
<td style="border: 1px solid rgb(204, 204, 204); padding: 10px; height: 18.5px;">-24.1</td>
<td style="border: 1px solid rgb(204, 204, 204); padding: 10px; height: 18.5px;">-10.7</td>
<td style="border: 1px solid rgb(204, 204, 204); padding: 10px; height: 18.5px;">29.6</td>
<td style="border: 1px solid rgb(204, 204, 204); padding: 10px; height: 18.5px;">15.3</td>
</tr>
<tr style="height: 18.5px;">
<td style="border: 1px solid rgb(204, 204, 204); padding: 10px; height: 18.5px;">MSCI China All Shares</td>
<td style="border: 1px solid rgb(204, 204, 204); padding: 10px; height: 18.5px;">-25.4</td>
<td style="border: 1px solid rgb(204, 204, 204); padding: 10px; height: 18.5px;">-17.9</td>
<td style="border: 1px solid rgb(204, 204, 204); padding: 10px; height: 18.5px;">-4.2</td>
<td style="border: 1px solid rgb(204, 204, 204); padding: 10px; height: 18.5px;">27.5</td>
<td style="border: 1px solid rgb(204, 204, 204); padding: 10px; height: 18.5px;">9.7</td>
</tr>
</tbody>
</table>
<p> </p>
<p><strong>Annualised returns to 30 June 2026 (%)</strong></p>
<table border="1" style="border-collapse: collapse; width: 100%; border-width: 0px; height: 92.5px;">
<tbody>
<tr style="height: 37px;">
<td style="border-width: 1px 1px 2px; border-style: solid; border-color: rgb(204, 204, 204) rgb(204, 204, 204) rgb(0, 0, 0); border-image: initial; padding: 10px; height: 37px; width: 61.3387%;"> </td>
<td style="border-width: 1px 1px 2px; border-style: solid; border-color: rgb(204, 204, 204) rgb(204, 204, 204) rgb(0, 0, 0); border-image: initial; padding: 10px; height: 37px; width: 13.1043%;"><strong>1 year</strong></td>
<td style="border-width: 1px 1px 2px; border-style: solid; border-color: rgb(204, 204, 204) rgb(204, 204, 204) rgb(0, 0, 0); border-image: initial; padding: 10px; height: 37px; width: 12.713%;"><strong>5 years</strong></td>
<td style="border-width: 1px 1px 2px; border-style: solid; border-color: rgb(204, 204, 204) rgb(204, 204, 204) rgb(0, 0, 0); border-image: initial; padding: 10px; height: 37px; width: 12.844%;"><strong>10 years</strong></td>
</tr>
<tr style="height: 18.5px;">
<td style="border: 1px solid rgb(204, 204, 204); padding: 10px; height: 18.5px; width: 61.3387%;">China Composite (gross)</td>
<td style="border: 1px solid rgb(204, 204, 204); padding: 10px; height: 18.5px; width: 13.1043%;">16.2</td>
<td style="border: 1px solid rgb(204, 204, 204); padding: 10px; height: 18.5px; width: 12.713%;">-7.3</td>
<td style="border: 1px solid rgb(204, 204, 204); padding: 10px; height: 18.5px; width: 12.844%;">8.3</td>
</tr>
<tr style="height: 18.5px;">
<td style="border: 1px solid rgb(204, 204, 204); padding: 10px; height: 18.5px; width: 61.3387%;">China Composite (net)</td>
<td style="border: 1px solid rgb(204, 204, 204); padding: 10px; height: 18.5px; width: 13.1043%;">15.3</td>
<td style="border: 1px solid rgb(204, 204, 204); padding: 10px; height: 18.5px; width: 12.713%;">-8.0</td>
<td style="border: 1px solid rgb(204, 204, 204); padding: 10px; height: 18.5px; width: 12.844%;">7.4</td>
</tr>
<tr style="height: 18.5px;">
<td style="border: 1px solid rgb(204, 204, 204); padding: 10px; height: 18.5px; width: 61.3387%;">MSCI China All Shares</td>
<td style="border: 1px solid rgb(204, 204, 204); padding: 10px; height: 18.5px; width: 13.1043%;">9.7</td>
<td style="border: 1px solid rgb(204, 204, 204); padding: 10px; height: 18.5px; width: 12.713%;">-3.9</td>
<td style="border: 1px solid rgb(204, 204, 204); padding: 10px; height: 18.5px; width: 12.844%;">6.0</td>
</tr>
</tbody>
</table>
<p><span class="source-text"><span style="font-size: 7.0pt; font-family: 'Helvetica Now Text',sans-serif; mso-fareast-font-family: 'Times New Roman'; mso-bidi-font-family: Arial; mso-ansi-language: EN-GB; mso-fareast-language: EN-GB; mso-bidi-language: AR-SA;">(MSCI All China prior to 27/11/19, MSCI Golden Dragon Prior to 02/05/19)</span></span></p>
<p><span class="source-text">Source: Revolution, MSCI. US dollars. Net returns have been calculated by reducing the gross return by the highest annual management fee for the composite. 1 year figures are not annualised.<br><br></span></p>
<p><strong>Past performance is not a guide to future returns.</strong></p>
<p>Legal notice: MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indexes or any securities or financial products. This report is not approved, endorsed, reviewed or produced by MSCI. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.</p>
<h3>Risk factors</h3>
<p>This communication was produced and approved in July 2026 and has not been updated subsequently. It represents views held at the time and may not reflect current thinking.</p>
<p>The views expressed should not be considered as advice or a recommendation to buy, sell or hold a particular investment. They reflect opinion and should not be taken as statements of fact nor should any reliance be placed on them when making investment decisions.</p>
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<p>All information is sourced from Baillie Gifford & Co and is current unless otherwise stated. </p>
<p>The images used in this communication are for illustrative purposes only.</p>
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