Matthews China Dividend Fund


Period ended 30 June 2019

For the first half of 2019, the Matthews China Dividend Fund returned 15.34%, outperforming its benchmark, the MSCI China Index, which returned 13.08%. For the quarter ending 30 June, the Fund returned -0.67% compared to the benchmark, which returned -3.92%.
 

Market Environment:

Just as the market seemed to be optimistically anticipating successful U.S.—China negotiations early in the year, President Trump's tweets presented new obstacles. China's equity market consequently suffered in May as the U.S. threatened to impose tariffs on Chinese exports, and trade negotiations broke down. In addition, the U.S. government declared a ban on the sale of U.S. technology to Chinese telecommunication giant Huawei Technologies. Considering the sales revenue that Huawei generated for U.S. companies, the unprecedented ban highlighted to investors the heightened risk of a technology cold war between the two nations, and led many to wonder whether more Chinese companies could lose their access to critical U.S. technology and supply chain. Investors finally found some relief later in the second quarter after President Trump and President Xi met during the G-20 Summit in Japan, and agreed to resume negotiations and ease some restrictions on sales to Huawei.
 
Meanwhile, the outlook for U.S. monetary policy changed dramatically in May as the markets anticipated the U.S. Federal Reserve would shift from its path of gradually raising interest rates and begin cutting rates.

Performance Contributors and Detractors:

Huaxin Cement, a leading cement company based in central China, was the top contributor to Fund performance in the first half of the year. This little-known company is actually a majority-owned subsidiary of global cement leader LafargeHolcim, a Swiss multinational. Huaxin nearly quadrupled its dividends per share this year on the back of strong earnings growth, and we consider its B-shares to still be attractively priced compared to many peers listed in China's A-share and H-share markets. Wuliangye Yibin, the leading high-end “baijiu” (Chinese white liquor) maker was the second-largest contributor during the first six months of the year as the company endeavored to close its product price gap with the top competitor Kweichow Moutai. Wuliangye Yibin recently launched a new version of its key product with some success, and has been warmly welcomed by investors.
 
China Everbright, a financial holding company, was the largest detractor to performance during the first half, as its earnings were hurt by a sharp drop in the stock of its subsidiary in 2018. We decided to exit the position.
 
During the first six months of the year, the Fund's outperformance was driven by both sector allocation and security selection. Our stock selection among the consumer discretionary sector was the main performance detractor, but this was offset by strong sector allocation and stock selection in the consumer staples sector. 

Notable Portfolio Changes:

During the quarter, we initiated a position in Yixintang Pharmaceutical, the leading pharmaceutical retail chain in southwestern China. We believe the company is well-positioned to grow revenues and earnings from China's changing landscape of prescription drug distribution.
 
The Fund also participated in the Hong Kong IPO of China East Education Holdings during the quarter. China East Education is known for its strong niche in culinary education, training chefs for the country's booming dining industry, and it is continuing to research other professional services area for growth. We believe professional talent is critical for China to develop its service industry. As the government has underinvested in this area, private companies could add strong value.
 
We exited our position in HSBC Holdings due to changes in the interest rate outlook and a lack of strong earnings growth drivers for the group. In addition, we sold Fanhua, a leading Chinese insurance broker, as its rich valuations premium compared to leading insurance companies in China and Hong Kong appears unjustified.

Outlook:

Continuing market volatility, driven by uncertainty over U.S.—China trade negotiations, has been disruptive to fundamental investors like us, as our core competence lies in analyzing company financials and strategies, rather than reading the tea leaves of geopolitical developments. President Trump's announcement following the G-20 meeting was fairly significant as it appeared that he has neither the interest nor intention of starting a new cold war with China. If this is indeed true, the Chinese equities market will again be driven by fundamentals and, we believe, current valuations are attractive and earnings appear quite positive. 

As of the report date, accounts managed by Matthews Asia did not hold positions in LafargeHolcim Ltd. and Kweichow Moutai Co Ltd.

Rolling 12 Month Returns for the period ended 30 June 2019
Matthews China Dividend Fund 2019 2018 2017 2016 2015
I (Acc) (USD) 0.73% 20.72% 25.70% -11.89% 23.51%
MSCI China Index (USD) -6.55% 21.42% 32.34% -23.20% 24.95%

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