What are you excited about for 2018? What do you think the Year of the Dog has in store?
Matthews Asia Portfolio Manager Tiffany Hsiao:
Oh, there’s a lot to be excited about! Investors who are seeking alpha in China’s more undiscovered areas have a lot to be optimistic about. China’s smaller companies include areas that are full of potential structurally and also solid from an earnings perspective. These are small caps that tend to be capital-efficient and also innovative because they simply need to be in order to survive.
Are you looking more closely at China’s A-share universe?
Yes, we continue to see a lot of opportunity in the A-share universe. But I would caution that it can be expensive. We are very careful about when we purchase shares and the sectors in which we invest. We do have a nice watch list so far. The beauty of China’s small caps is that there are many companies that investors may overlook if they aren’t considering them carefully enough. Sometimes you need to dig deeper to find some nice surprises.
In which sectors are you expecting to find the best hunting grounds for holdings?
I expect China’s ongoing reforms to create healthy prospects for several sectors. Consider the government’s stricter stance toward cleaning up the environment. The country is still powered by dirty coal, so the government has been stringent on the use of coal lately in order to clean up the air and water. Supply-side reform is happening in certain sectors, such as materials and energy. I think these changes will ultimately create opportunities for companies that have better cost disciplines and can gain regional market share.
We also believe China will be a powerhouse in global health care, whether it is in pharmaceuticals or drug discovery or diagnostics. This is really interesting because, in the past, the Chinese have been famous “copy cats.” But it’s definitely moved away from that image and mentality, and the government has put in place a lot of new initiatives to help the country’s entrepreneurs become global innovators.
In fact, new regulations in China now allow companies that are able to file their drugs with the U.S. Food and Drug Administration (FDA) to gain an easier path to recognition from the Chinese agency equivalent. This means clinical trial results will be recognized faster in China. And this encourages companies to file innovative drugs with the FDA and to step outside of Chinese boundaries.
It sounds like China’s health care industry is making great strides in innovation.
Yes, the government is fully supporting the health care industry. Another great example—and also to give some context versus the U.S.—there is no public program to screen people’s DNA in the U.S. The only DNA that tends to get screened regularly in the U.S. involves genetic diseases among newborn babies. In China, however, there are multiple programs where the government is actually paying
to get its population sequenced. This is really groundbreaking. Think about the amount of data it can gather from millions of people to study patterns of DNA mutations and try to find cures for diseases.
What is the source of your drive and passion for China’s smaller businesses?
I’ve always been a big advocate for the underdog. I attribute this to my family’s values. My grandfather on my father’s side was a volunteer fireman who died trying to help someone save their home. So my sister and I were always told we had to live our lives to be useful to make up for his sacrifice. My father grew up with just a single mother and little education in a southern fishing village in Taiwan. All odds were stacked against him. Still, he persevered and managed to climb out of poverty as an inventor. He headed R&D for a Taiwanese calculator company that created one of the world’s first laptops and turned the company into one of the world’s largest laptop manufacturers today.
We moved to Silicon Valley when I was in elementary school. My father eventually became an angel investor and he would bring me along to meetings with start-ups. I can still remember drawing on the white boards of small start-up offices while in the background they discussed new technologies that would come to change the lives of future generations. By helping to fund these small, entrepreneurial companies, my father allowed them the opportunity to pursue innovation in the late 1990s and 2000s in Silicon Valley.
When I look at what’s happening in China now, it reminds me of all the exciting changes I saw growing up in Silicon Valley. And the benefit of growing up as the daughter of a Taiwanese inventor is I still have my father’s dear scientist friends and experts to consult. Not to mention, if a Chinese company tells me it has the best this or the best that, I drive right down the road to Silicon Valley and ask competitors if this is truth or hyperbole.