Matthews China Dividend Fund


Period ended 30 June 2020

For the first half of 2020, the Matthews China Dividend Fund returned 3.31%, while its benchmark, the MSCI China Index, returned 3.58%. For the quarter ending 30 June 2020, the Matthews China Dividend Fund returned 18.16%, while its benchmark, the MSCI China Index, returned 15.37%.

Market Environment:

Asia's markets experienced considerable volatility related the global COVID-19 pandemic, but Chinese equities generated the strongest returns in the region, as domestic Chinese sentiment gained strength on the back of a quick resumption of economic activity. China, along with South Korea and Taiwan, made considerable progress in flattening its curve of new virus infections in the reporting period. Amid strong returns, we also saw some volatility related to the Chinese government's amendment of national security laws in Hong Kong during China's annual gathering of its top legislative body, the People's Congress. Although the nature and legislative process of this law is arguably controversial, it was passed and became effective in Hong Kong on July 1, which attracted international attention and protests from Hong Kong citizens.

On the economic polices front, China's central bank refrained from adopting unconventional monetary policy tool such as Quantitative Easing and a zero interest rate. It has only guided down the benchmark lending rate by 10 to 20 basis points (0.10% to 0.20%) during April, while cutting required reserve ratio to release liquidity from the banking system. In terms of fiscal policy, the People's Congress adopted a budget with historical high fiscal deficit of 3.76 trillion renminbi, and for the first time, it breached 3% of China's GDP.

Performance Contributors and Detractors:

Strong stock selection made a significant contribution to relative performance in the first half of the year, with Hope Education Group, Tencent Holdings and Sun Art Retail Group contributing the most. Hope Education, a provider of educational services including training and knowledge point sharing, had very limited revenue impact from the COVID-19 outbreak, and the company also reported strong earnings. Tencent Holdings, the leading social media company in China has a wide range of product offerings including online games, mobile messaging and mobile payment. These offerings significantly gained their popularity during lock down and social distancing period in China. The Fund's third largest contributor was Sun Art Retail Group, China's largest hypermarket operator. Sun Art Retail benefited significantly from consumers stocking up on food and groceries and spending less time eating out. From a sector perspective, the Fund's significant underweight allocation to financials and security selection in real estate contributed most to the Fund's outperformance during the first half of the year. 

On the other hand, Geely Automobile was the largest performance detractor as passenger car sales plunged due to the pandemic. However, we believe the company will continue to be a leader among China's domestic branded passenger car makers. However, the planned merger with its parent controlled Volvo Cars could impair its ability to pay dividends in the near future, thus we decided to exit the position. Security selection in communication services and industrials sectors also caused a significant drag to Fund performance during the first half of the year. Two of the top three detractors were China B share market listed industrial companies, Shanghai Mechanical & Electrical Industry, a leading elevator maker in China, and Guangdong Provincial Expressway Development, a regional toll road operator in Guangdong province. China's B share market, originally designed for only foreign investors, has been gradually marginalized as A shares are now accessible to global investors. However, there are still companies listed as B shares on the Shanghai and Shenzhen exchanges in foreign currency with sound fundamental while offering highly attractive dividend yield and valuation. But, due to the less liquid nature of the B share market, they could underperform further in a severe sell off. 

Notable Portfolio Changes:

During the second quarter, we initiated a new position in Tsingtao Brewery, one of the oldest Chinese companies listed in Hong Kong. We believe the Chinese beer industry is entering into a market share consolidation phase with top four market share leaders all focusing on premium products and profitability. In addition, for the first time of its history, Tsingtao Brewery launched a share based management incentive program to align management's interest with minority shareholders. We believe the positive industry dynamics and management incentive could revitalize one of the best known consumer brands in China. We also initiated a position in Zhongsheng Group Holdings, a large premium car dealership network operator in China to replace Geely Automobile.

During the quarter, we exited our position in Hua Hong Semiconductor as the company decided to cut its dividend to maintain financial flexibility. We also exited China Merchants Bank as we expect the liquidity injection by central banks both domestic and globally will impact commercial banks' ability to keep their profitability.

Outlook:

As China started to recover its economic activity, its leaders have also been cautioning that the country is increasingly likely to be isolated politically and economically due to potential sanctions and diversification of global supply chain. “Internal Circulation” strategy of domestic consumption and home grown technology—key investment themes for us—has been proposed as a potential solution. We believe these themes will become even more attractive investment areas. 

In the meantime, we are encouraged to see China has not given up its effort to open further to the world. In June, the Chinese government announced some major policy initiatives to make Hainan Island, a free trade port benchmarked to Dubai and Singapore. These include significantly increasing Chinese tourists' duty free spending limit, lowering corporate and personal income tax on the island to a low rate comparable to Hong Kong and Singapore and allowing more business areas for foreign investors to invest. These efforts could sow early seeds of a much freer open economy very much like China launching a few special economic zones along its coast 40 years ago. 


Rolling 12 Month Returns for the period ended 30 June 2020
Matthews China Dividend Fund 2020 2019 2018 2017 2016
I (Acc) (USD) 2.85% 0.73% 20.72% 25.70% -11.89%
MSCI China Index (USD) 13.28% -6.55% 21.42% 32.34% -23.20%

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