For the first half of 2023, the Matthews Pacific Tiger Fund returned -1.24% (Investor Class) and -1.19% (Institutional Class), while its benchmark, the MSCI All Country Asia ex Japan Index, returned 3.19% over the same period. For the quarter ending June 30, 2023, the Fund returned -5.33% (Investor Class) and -5.32% (Institutional Class), while the benchmark returned -1.14%.

Market Environment:

The Asian markets have been on a roller coaster largely because of the gyrations in Chinese equities as the post-COVID boost to the local economy is proving to be more gradual than previously expected. China lagged considerably as market participants remained underwhelmed with the pace of China’s recovery which has proven to be more ‘slow and steady’ than a ‘consumption led boom.’ As a result, Chinese equities were one of the worst performing during the quarter, and for the first half of the year. In addition, pessimistic sentiment in China has pushed the Chinese currency to its weakest level since October 2022, and close to its five-year lows versus the U.S. dollar. Contrary to expectations earlier in the year, Taiwanese and South Korean equities outperformed the rest of the region on the back of hopes for a recovery in semiconductor demand, and benign valuations.

Property and consumer stocks were among the weaker sectors year-to-date, largely reflecting the tepid recovery in China. Small caps outperformed large cap as ongoing geopolitical risks continued to push the embedded risk-premium in overseas listed Chinese American Depository Receipts (ADRs), many of which are larger sized stocks. Most of the Asian currencies weakened as rising interest rates spurred the U.S. dollar, while central banks in Asia have largely stopped raises rates.

Performance Contributors and Detractors:

From a country perspective, stock selection in China was the biggest detractor to performance during the quarter, and year-to-date periods, as the portfolio’s consumer related holdings continued their underperformance amid overall macroeconomic concerns on the pace of consumption recovery. However, we believe these companies are well positioned to lead the economic recovery over time given their resilient earnings. Stock selection in the Philippines also detracted from relative performance during the first half. On the other hand, information technology companies in South Korea and Taiwan contributed positively. The positive performance was attributed to the combination of better-than-expected earning and clear prospects in terms of demand as shown in the case of a Taiwan based datacenter component manufacturer. Indian consumer discretionary companies also contributed positively with continued strong earning deliveries.

At the individual holdings level, the top detractors to both relative and absolute performance for the first half of the year came from China, including the leading Chinese duty free shop operator China Tourism Group Duty Free. While the company went through the normalization process of operation after the pandemic, its earning improvement was slower than sales as discounting and inventory management takes time. This can be transitionary adjustment process rather than structural as the company’s market share is intact and management continues to make efforts to improve the company’s product mix. Another notable detractor was the leading food delivery and local service company in China, Meituan. The company executed well during the pandemic and the reopening phase, accelerating its path towards profitability ahead of the management’s original target. However, negative sentiment around the China’s consumption recovery and potential competitive pressure has outweighed, and Meituan’s share price did not react positively.

In contrast, one of the notable contributors was a Taiwanese datacenter component manufacturer Accton Technology. As datacenter upgrades continue, especially from global cloud service providers, Accton has been a beneficiary of secular upgrade demand in switches. As some of the supply chain bottlenecks that delayed the product delivery has been resolved, the company’s earning delivery has been robust. Another contributor during the period was India’s leading jeweler, Titan Company. The company delivered good results last year and, against the expectation of potential growth slow down, Titan continued to deliver robust growth and brand value helped by retail store expansion and continuous category expansion into watches and eyewears.

Notable Portfolio Changes:

The second quarter was a relatively quiet quarter as no major directional shifts were made. We increased the portfolio’s relative concentration in high conviction China names by slowly decreasing the weightings of holdings with less certain growth prospects. With a broad valuation correction in China, we continue to assess new high-quality opportunities. Overall, the biggest active risk in the portfolio is from an overweight to domestic consumption in China. The portfolio remains underweight South Korea reflecting some concerns on the global growth outlook.

Outlook:

Despite the divergence in Asia markets year-to-date performance, Asia equity markets are attractively positioned in terms of relative valuation especially with respect to its earnings prospects. We expect double-digit earnings growth in China and India over next two years. As post COVID activity continues to normalize in China, we believe there will be opportunities for domestically oriented growth. For Taiwan and South Korea, a mix of secular growth opportunities in the technology sector together with cyclicality continue to provide stock picking opportunities. With the U.S. Federal Reserve’s interest rate cycle coming into final stages and a mixed backdrop on global demand, we expect that domestic demand in Asia should show resiliency.

View the Fund’s Top 10 holdings as of June 30, 2023. Current and future holdings are subject to change and risk.

Average Annual Total Returns - MAPTX as of 06/30/2023