Matthews China Dividend Fund
Period ended September 30, 2019
For the quarter ending Sept. 30, 2019, the Matthews China Dividend Fund returned -5.83% (Investor Class), while its benchmark, the MSCI China Index, returned -4.67%.
Chinese equities were down in the third quarter, succumbing to trade-related pressures and negative sentiment. U.S.-listed Chinese ADRs were particularly weak amid U.S-China trade tensions. Although the near-term outcome of trade negotiations remains unpredictable, a slowing U.S. economy could put pressure on U.S. President Donald Trump to negotiate as U.S. elections draw closer.
Meanwhile, Hong Kong protests remain ongoing and tensions continued following the reporting period. Looking back to an earlier protest, the umbrella movement of 2014 lasted for several months, so current protests could take time to unwind. Notably, the portfolio has limited exposure to companies directly impacted by the protests. Hong Kong protests continue to feature prominently in global headlines, contributing to negative sentiment among global investors.
We believe these geopolitical uncertainties are creating compelling long-term investment opportunities.
Performance Contributors and Detractors:
In a volatile market environment, it was not surprising that two education-service companies were the top contributors to performance in the third quarter. China East Education, whose shares we bought in the second quarter via its initial public offering, performed well. Another long-term holding, New Oriental Education & Technology, also was a strong performer amid clearer regulation of online tutoring services in China.
Yangzijiang Shipbuilding was the largest detractor to performance for the quarter, as its chairman was asked for assistance in investigating a retired government official for suspected corruption. Although we believe the company's operation will not be immediately impacted, we decided to exit the position as this type of investigation could drag on for years. Yixintang Pharmaceutical, the regional pharmaceutical retailing chain, was the second-largest detractor to performance. Market participants worried about the impact of the government's new pricing policy for subscription drugs on its business. We are closely monitoring the situation.
Notable Portfolio Changes:
During the quarter, the Fund initiated a position in China Unicom, the second-largest mobile carrier in China. We believe its cost-saving initiatives, including a joint venture with China Telecom to build a 5G network, will be meaningful in reducing its capital expenditures.
We exited our position in Inner Mongolia Yili Industrial Group. The company's handling of its executive-compensation option plan was unfair to minority shareholders in our view. We also sold our holdings of BBI Life Sciences, as its growth was below our initial expectations.
Whether China reaches a trade deal with the U.S. is important only in the short term, as it would improve market sentiment. We believe China's economic growth, however, is slowing with or without a trade war. That does not mean we cannot find attractive businesses within China, as valuations are attractive and domestically focused Chinese companies appear likely to maintain positive earnings growth. And when there are changes of consumer behavior or rising productivity in world's second-largest economy, the opportunity is too large for businesses to overlook. As long as China remains committed to be open to the outside world, we will continue to use our total return approach to find most compelling investment opportunities for our investors. Maintaining an overall balanced exposure between dividend payers and dividend growers, we believe the Fund provides a lower-volatility approach to capturing China's long-term growth potential.
As of 9/30/2019, the securities mentioned comprised the Matthews China Dividend Fund in the following percentages: China East Education Holdings, Ltd. 2.1%; New Oriental Education & Technology Group, Inc. 3.4%; Nissin Foods Co., Ltd. 1.9%; Yixintang Pharmaceutical Group Co., Ltd. 1.7%; China Unicom Hong Kong, Ltd. 3.0%. The Fund held no positions in Yangzijiang Shipbuilding Holdings, Ltd.; China Telecommunications Corp.; Mongolia Yili Industrial Group Co., Ltd.; or BBI Life Sciences Corp. 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. Past performance is no guarantee of future results.
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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.