Matthews China Dividend Fund

Period ended 31 March 2020

For the quarter ending 31 March 2020, the Matthews China Dividend Fund returned -12.57%, while its benchmark, the MSCI China Index, returned -10.22%.

Market Environment:

While global equities markets were in a brisk rally to celebrate the formal signing of phase one trade deal between U.S. and China, market participants had not paid significant attention to an unknown virus in central China's megacity Wuhan. No one would have expected this coronavirus, officially named COVID-19, would cause the greatest global pandemic in recent human history.

During the prolonged trading suspension period of China's domestic A-share market due to the Lunar New Year holiday and COVID-19, Hong Kong markets had already started to negatively react to the economic consequences of various lock down measures taken by the Chinese government. Sectors sensitive to people movement such as tourism, restaurant and offline entertainment have been hit hardest. After the A-share market resumed trading on February 3, it experienced a one day heavy selloff, but started to recover strongly as the infection situation in China started to show signs of stability. As the virus started to heavily hit European countries, causing tremendous pressure on global economic growth, Chinese equities started to decline again, led by export-oriented industries such as textile, electronic goods. 

On March 8, 2020, Saudi Arabia initiated an oil price war with Russia, which triggered serious concerns on the U.S. shale oil industry and U.S. high yield credit spread spiked as a result. This development, together with rapid growing COVID-19 infections in the U.S., caused sharp selloffs in U.S. equities. The Federal Reserve quickly cut its benchmark interest rate to zero to boost the ailing economy, and later on March 23, the Fed announced unlimited quantitative easing to purchase Treasury and mortgage-backed securities to support financial markets; global equities markets saw their bottom from that point. 

Performance Contributors and Detractors:

During the quarter, our holdings in the consumer discretionary sector were the top detractors to the Fund's performance. Names including Geely Automobile and Gree Electronic Appliance experienced a significant decline in their share prices, as concerns regarding a broad-based, global manufacturing shutdown mounted due to the virus impact and weakening consumer spending on discretionary items. 

As for our top performance distractor during the quarter, China Suntien Green Energy, we would categorize it as a truly special situation. After the company reported healthy profit growth for 2019, China Suntien cancelled its dividend payment, triggering a severe selloff after the disappointment. However, we expect the company to resume dividends in the coming year and remain confident in the company's long-term prospects. We took the opportunity to expand our position.

On the other hand, among the top contributors to the Fund's performance was our holding in Hope Education Group, a private operator of higher education institutions in China. Hope Education's revenue had very limited impact from the COVID-19 outbreak as much of the tuitions were pre-collected. In addition, the company reported strong 2019 earnings. The Fund's second largest contributor was Sun Art Retail Group, one of the largest hypermarket operators in China. The company witnessed a demand surge for its hypermarket business, as Chinese consumers were stocking up food and other daily necessities during the coronavirus outbreak in China. The strict, stay-at-home quarantine measures adopted in China gave rise to the various online e-commerce retailing businesses, including Sun Art's online grocery delivery business. Sun Art's share price delivered a double-digit, positive return despite the broad market sell-off.

Notable Portfolio Changes:

During the quarter, we initiated a new position in Livzon Pharmaceutical Group. Livzon is one of the oldest privately owned pharmaceutical companies in China with diversified products across various medicines. During the first quarter, Livzon announced a new employee incentive plan with emphasis on both healthy profit growth and healthy dividend payout ratio, which we believe is rare among China's pharmaceutical industry. 

In light of the potential speed up of 5G telecom infrastructure investment in China, we switched our holding in China Unicom to China Tower Corporation. Our original investment thesis on China Unicom was based on its joint development with China Telecom on 5G which could reduce its CapEx spending on 5G rollout. However, given that 5G infrastructure investment is now included in the government's stimulus program, we sold our position to fund the purchase of China Tower. We believe the telecom tower company will benefit more directly if telecom carriers such as China Unicom and China Telecom add more wireless base stations onto its towers without much incremental cost. 

During the market selloff, we exited Yixintang Pharmaceutical Group, JNBY Design and Nissin Food due to our reduced conviction of their long-term growth potential, while using the proceeds to add to our holdings where we have stronger conviction. 


Although the Chinese economy has recovered from the worst phase of the virus (as of this writing, Wuhan, the original epicenter has reopened and reconnected with other parts of China), Chinese companies are facing strong near-term earnings headwind, caused by the sudden supply side disruption initially and demand side shock later on. 

However, as China's economy has transformed from being export led to one that is now consumption led, the recovery of Chinese corporates' earnings could still be much faster than other major markets, as people's lives come back to normal sooner than other parts of the world. In addition, the valuation of Chinese equities is still lower than U.S. equities, even after the recent outperformance. Thus, we believe Chinese equities are still very attractive for long-term investors. 

Rolling 12 Month Returns for the period ended 31 March 2020
Matthews China Dividend Fund 2020 2019 2018 2017 2016
I (Acc) (USD) -13.54% 3.44% 28.18% 17.66% -1.37%
MSCI China Index (USD) -5.66% -6.08% 39.15% 19.93% -18.66%

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