Matthews Asia Dividend Fund


Period ended March 31, 2020

For the quarter ending March 31, 2020, the Matthews Asia Dividend Fund returned -19.10% (Investor Class), while its benchmark, the MSCI All Country Asia Pacific Index, returned -19.21%. 

Market Environment: 

Faced with the grave socio-economic damage inflicted by the COVID-19 pandemic, Asian equity market experienced tremendous volatility during the first quarter of 2020. An initial selloff of Chinese equities in late January morphed into a global financial market selloff by mid-Feb. When the virus spread hit hard the developed countries, shutting down many of the economies in the West was the only option to avert the worse-case scenario. Such selloff was further exacerbated by forced liquidation from leverage investors and the collapse of oil price, causing significant market dislocations. Normality only partially returned after unprecedented global responses from both central banks' monetary-easing policies and governments' fiscal stimuli, and Asian equity markets bounced off its recent lows.
 

Performance Contributors and Detractors: 

During the quarter, our holdings in regional auto-parts stocks were the top detractors to the Fund's performance. Names including Minth Group, Hyundai Mobis, and Minda Industries experienced a significant decline in their share prices, as broad-based, global auto manufacturing shutdown concerns mounted due to the virus impact. Recognizing the near-term challenge faced by these auto-parts businesses, we decided to consolidate our holdings. We trimmed names whose long-term growth prospect did not look as attractive as other new opportunities presented by the market selloff, while maintaining exposure in holdings with strong, structural growth driver intact, and with a strong balance sheet to withstand any market liquidity stress. 

On the flip side, among the Fund's top contributors to performance was our holding in 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 the mainland. Controlled by the Alibaba Group, Sun Art also serves as a key component in Alibaba's "New Retail" strategy which aims to offer a seamless convergence between the online e-commerce and the traditional offline-retailing. 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: 

While the near-term earnings outlook for many Asian companies will be impacted negatively by the virus outbreak, the competitive position and structural growth drivers for certain businesses should be less affected from a long-term perspective. Operating with this framework, the market selloff during the quarter, as painful as it was, presented a great opportunity to improve the quality of our portfolio holdings by picking up high-quality, structural growth businesses at a discounted price which is rarely available to investors. 

We initiated several new positions during the quarter, mostly in China and Japan, and in the consumer discretionary and technology sectors. Two of those new positions are China Int'l Travel Service, a Chinese duty-free retailer listed in China's domestic A-share market, and Oriental Land, the operator of Tokyo Disney Land theme park in Japan. While we agree that both companies' near-term operations will be significantly affected by the virus containment measures, the long-term investment appeal becomes even stronger with share prices coming off between 20%-30% from pre-virus valuations. With a net-cash balance sheet, both companies have the financial strength to weather the current downturn. We consider China International Travel Service and Oriental Land as two good additions to our "dividend growers" bucket in the portfolio. To fund these new purchases, we exited a few positions including Outsourcing, Ping An Insurance, Capitaland Commercial Trust during the quarter.
 

Outlook: 

Although the major manufacturing economies in North Asia have passed the worse phase of the virus outbreak thanks to their aggressive mitigation measures adopted early on, Asian companies are facing a strong, near-term earnings headwind, caused by the sudden demand shock from the western economies. On the other hand, the growth model for Asian economies today, led by China, has evolved significantly over last decade, with domestic consumption replacing export as the key driver for growth. Such structural shift away from export-led growth and towards domestic consumption is also reflected in the changing equity market composition. Many of today's largest listed companies in Asia are domestic-facing businesses. Because of such structural shift, we believe corporate earnings in Asia today are potentially more resilient to external shock, and we believe the same to be true for the resilience of dividends in Asia. While uncertainty abound, we remain constructive on the long-term Asian equity story. 


As of March 31, 2020, the securities mentioned comprised the Matthews Asia Dividend Fund in the following percentages: Minth Group, Ltd. 3.9%; Hyundai Mobis Co., Ltd. 1.8%; Minda Industries, Ltd. 1.2%, Sun Art Retail Group, Ltd. 2.7%; China International Travel Service Corp., Ltd. A Shares 1.7%; Oriental Land Co., Ltd. 1.5%.

The Fund held no positions in Outsourcing, Inc., Ping An Insurance Group Co. of China, Ltd. H Shares, CapitaLand Commercial Trust, REIT. Current and future portfolio holdings are subject to change and risk. 




There is no guarantee that a company will pay or continue to increase dividends.

 

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The views and opinions in this commentary were as of the report date, subject to change and may not reflect 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.

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. Neither the funds nor the Investment Advisor accept any liability for losses either direct or consequential caused by the use of this information.