Matthews China Dividend Fund


Period ended 30 September 2020

For the quarter ending 30 September, 2020, the Matthews China Dividend Fund returned 7.28%, while its benchmark, the MSCI China Index, returned 12.57%.

Market Environment:

Chinese equities went through another volatile quarter in terms of political tension. U.S. — China tension escalated to a new height in July when the U.S. ordered China to close its consulate in Houston, and in retaliation, China ordered the closure of the U.S. consulate in Chengdu. Additionally, in early August, President Trump signed an executive order to ban popular apps Tiktok and WeChat in the U.S. on national security concern. However, due to the vague wording in the executive order, it was not clear how the ban would be implemented and how wide of an impact it would have on Tencent, which developed WeChat, creating stock price volatility.   

The Chinese renminbi, along with other major currencies, strengthened against the U.S dollar during the quarter as the market priced in the risk of a prolonged shut down of the U.S. economy caused by COVID-19 and unlimited quantitative easing by the U.S. Federal Reserve. 

Performance Contributors and Detractors:

During the third quarter, Shanghai Baosight Software was the top contributor to the Fund's performance. The industrial software developer/data center operator reported 67% earnings growth for the second quarter as its new data center is put into operation. Auto parts supplier Minth Group rose as it further enters the supply chain for electric vehicles via its battery housing business and was the Fund's second largest contributor to performance. The Fund's third largest contributor was Powerlong Commerical Management, a shopping center property manager focused on lower tier cities in China. 

On the other hand, a few names that performed well during the first half of the year became the largest performance detractors during this quarter due to profit taking. Sun Art Retail Group, the largest hyper market operator in China was the largest performance detractor, as markets started to worry that Chinese consumers will slow their spending. It is also facing emerging competition for grocery delivery from delivery platforms. Livzon Pharmaceutical Group also declined during the quarter due to profit taking. Additionally, the Fund's significant underweight allocation and stock selection in the consumer discretionary sector detracted from performance. This is partly due to Alibaba Group's outsized weight in the benchmark index and stellar performance during the quarter which the Fund does not own. 

Notable Portfolio Changes:

During the quarter, we initiated positions in two A-share companies newly listed this year: Bafang Electric Suzhou and Leader Harmonious Drive System. Bafang manufactures components in electric bicycles, which is increasingly gaining popularity globally. Leader Harmonious Drive System is a maker of precision transmissions used in industrial robots. We believe both companies have high potential to rival their global competitors in their niche areas. In addition, we participated in two IPOs in the for-profit education industry: Cathay Media and Education and Neusoft Education Technology. Both companies are focused on niche academic fields such as media/performance and information technology. 

We took profits from convenience store chain Chengu Hongqi and exited our position in the company but we will continue to monitor the company and its first foray outside of its home province. We also exited Sunevision Holdings, Hong Kong's largest data center operator, given the increasing likelihood global internet companies may forego Hong Kong as a location to host their data due to concern over National Security Law implemented this year. 

Outlook:

Chinese manufacturing data points to a continued V-shaped recovery, and retail sales data registered positive year- over-year growth during September. During the October 1st National Day golden week holiday, it is reported that half a billion Chinese consumers started vacationing domestically, and the packed tourist spots served as reminder of China's consumer spending power outside of China before COVID-19. Thus, we believe domestic consumption still has ample room of growth in China. 

Fiscal stimulus in China has been incremental in scope and highly targeted, a trend we expect may continue. Interest rates in China have moved higher, reflecting China's economic resilience amid the pandemic. Looking ahead, we expect to see continued recovery in China's economic activity. While China is not immune from a global slowdown, it may be better positioned than other large economies to maintain its long-term growth and we continue to seek and invest in attractive dividend-paying stocks with improving growth outlook.


Rolling 12 Month Returns for the period ended 30 September 2020
Matthews China Dividend Fund 2020 2019 2018 2017 2016
I (Acc) (USD) 17.49% 0.84% 5.11% 21.35% 19.69%
MSCI China Index (USD) 33.76% -3.77% -2.05% 33.27% 13.18%

Risk Considerations

The value of an investment in the Fund can go down as well as up and possible loss of principal is a risk of investing. Investments in international and emerging market securities may involve risks such as social and political instability, market illiquidity, exchange-rate fluctuations, a high level of volatility and limited regulation. The Fund invests in holdings denominated in foreign currency, and is exposed to the risk that the value of the foreign currency will increase or decrease. The Fund invests primarily in equity securities, which may result in increased volatility. There is no guarantee that the Fund or the companies in its portfolio will pay or continue to pay dividends. Investments in a single-country fund may be subject to a higher degree of market risk than diversified funds because of concentration in a specific country. These and other risks associated with investing in the Fund can be found in the Prospectus.



There is no guarantee that a company will pay or continue to increase dividends. 

Performance figures discussed in the Fund Manager Commentary above reflect that of the Institutional Accumulation Class Shares and has been calculated in USD. Performance details provided for the Fund are based on a NAV-to-NAV basis, with any dividends reinvested, and are net of management fees and other expenses. Past performance information is not indicative of future performance. Investors may not get back the full amount invested.

The information contained herein has been derived from sources believed to be reliable and accurate at the time of compilation, but no representation or warranty (express or implied) is made as to the accuracy or completeness of any of this information. Matthews International Capital Management, LLC (“Matthews Asia”) and its affiliates do not accept any liability for losses either direct or consequential caused by the use of this information. 

Information contained herein is sourced from Matthews Asia unless otherwise stated. The views and opinions in this commentary were as of the report date, subject to change and may not reflect the writer’s current views. They are not guarantees of performance or investment results and should not be taken as investment advice. Investment decisions reflect a variety of factors, and the managers reserve the right to change their views about individual stocks, sectors, and the markets at any time. As a result, the views expressed should not be relied upon as a forecast of the Fund’s future investment intent. It should not be assumed that any investment will be profitable or will equal the performance of any securities or any sectors mentioned herein. The information does not constitute a recommendation to buy or sell any securities mentioned.

Investors should not invest in the Fund solely based on the information in this material alone. Please refer to the Prospectus for further details of the risk factors.

Sources: Brown Brothers Harriman (Luxembourg) S.C.A, Matthews Asia, FactSet Research Systems, Bloomberg