Period ended September 30, 2019
For the quarter ending Sept. 30, 2019, the Matthews Asia Dividend Fund returned -1.54% (Investor Class), while its benchmark, the MSCI All Country Asia Pacific Index, returned -1.24%.
Asian markets remained volatile during the third quarter amid uncertainty generated by U.S.–China trade tensions. Political unrest in Hong Kong also weighed on China/Hong Kong markets during the quarter, further dampening investor sentiment. On a positive note, central bankers and policymakers in many parts of Asia started shifting toward easing policies to help boost growth with both interest-rate cuts and fiscal stimulus measures. Corporate earnings for Asia, while still in the negative growth territory on a year-over-year basis, started showing signs of bottoming.
Performance Contributors and Detractors:
During the third quarter, a top performance contributor to the Fund was Minth Group, an auto-parts company in China. As discussed in previous commentary, Minth's business growth is being disrupted by the current severe downturn in China's automobile industry. Together with market concerns on its U.S. export business exposed to the trade war, Minth's shares were aggressively sold off over past 12 months, becoming a main performance detractor. Just as overall sentiment turned very bearish, however, Minth's first-half 2019 earnings, despite registering a 9% year-over-year decline, was actually an upside surprise to the market consensus. Both a sequential recovery of its gross margin, an importantly operating indicator, and a sustained growth of its overseas operations, helped the company to partially offset the tough domestic business. Its share price staged a relief rally.
On the flip side, some of the Fund's holdings in cyclical stocks, including United Tractors, an Indonesian mining equipment distribution and contracting business, and LG Chem, a South Korean petrochemical major and a global leading EV battery manufacturer, were among the top detractors to performance during the quarter. Both companies' near-term earnings delivery was negatively impacted by weak commodity prices and an uncertain demand outlook.
Notable Portfolio Changes:
During the quarter, the Fund initiated several new positions, including Singapore-listed real estate investment trusts such as NetLink NBN Trust, a broadband network infrastructure asset owner; CapitaLand Commercial Trust, an office investment property landlord; and Keppel DC, REIT, a data-center portfolio owner. All three stocks provided significant yield pickup in a low-interest-rate environment, and at the same time they still have company-specific growth drivers that can make them a potentially attractive total-return investment. In addition, we also added two new dividend growth stocks, both in the consumer discretionary sector, namely Zhongsheng Group, a Chinese auto dealership business, and China East Education, the largest vocational education business in China that held an initial public offering in Hong Kong. We believe both companies have structural growth drivers to support solid cash-flow generation and potentially significant growth in dividends.
On the other hand, the Fund exited a few companies, including Far East Horizon, Hua Hong Semiconductor and Dairy Farm. For each, we believed that changes in business fundamentals no longer supported our initial investment thesis. We decided to redeploy the capital, including funding some new positions.
A protracted U.S.—China trade war continues to be the biggest overhang for Asian equities. Notwithstanding, policymakers in both Asia and the U.S. are deploying policy tools to address any significant slowdown. From a bottom-up perspective focusing on company fundamentals, the current macro and geopolitical uncertainties are creating compelling long-term investment opportunities in Asia.
As of 9/30/2019, the securities mentioned comprised the Matthews Asia Dividend Fund in the following percentages: Minth Group, Ltd. 4.3%; PT United Tractors 1.1%; LG Chem, Ltd., Pfd. 1.6%; NetLink NBN Trust 1.2%; CapitaLand Commercial Trust, REIT 1.2%; Keppel DC, REIT 1.1%; Zhongsheng Group holdings, Ltd. 1.1%; China East Education Holdings, Ltd. 1.3%. The Fund held no positions in Far East Horizon, Ltd.; Hua Hong Semiconductor, Ltd.; or Dairy Farm International Holdings, Ltd. Current and future portfolio holdings are subject to change and risk.