Period ended June 30, 2020
For the first half of 2020, the Matthews Asia Value Fund returned -4.43% (Investor Class), while its benchmark, the MSCI All Country Asia ex Japan Index, returned -4.65%. For the quarter ending June 30, 2020, the Fund returned 16.28% (Investor Class and Institutional Class) vs. the benchmark, which returned 16.79%.
The first half of the year was a tale of two halves—global market plunge that set quite a few records in the first quarter followed by a huge rally in the second. Central banks worldwide have pumped unprecedented amount of liquidity into the system to stem potential COVID-19 lockdown-induced economic collapse. We believe that this extraordinary amount of liquidity has found its way to the global equity market, fueling one of the biggest quarterly rallies seen in modern history. The extent of the logic-defying rally, however, contrasts sharply with the underlying bleak economic and unemployment data worldwide. The two are increasingly detached from each other, particularly for the U.S. market. Value stocks in Asia, as well as elsewhere, continued to lag substantially whereas investors cannot seemingly buy enough of growth and momentum driven stocks, particularly in the technology sector.
Performance contributors and detractors:
The Fund slightly outperformed the index in the first half of the year and held onto the big rally in the second quarter without lagging much, thanks to stock selection. Our top contributor was again South Korea's Samsung SDI, which specializes in lithium ion battery technology, with the market getting bullish on long-term profitability of its electric vehicle (EV) battery business. We suspect that Tesla's recent meteoric rise in its share price has also brought a halo effect to many stocks plugged into the EV supply chain. We took advantage of the euphoria and trimmed our stakes in Samsung SDI substantially in the quarter.
Bharti Infratel, the largest telecom tower business in India, was the other major positive contributor in the second quarter. We initiated our position in the first quarter when there was substantial fear in the market that one of their biggest customers, Vodafone Idea, was going to collapse. This remains an overhang as final supreme court ruling—on how much and over how long of a payment term that all telecom carriers can pay back overdue tax to the government—is now further postponed. However, news flows throughout the second quarter signaled to the market that pricing in the overall mobile telecom industry hit bottom last year. This has likely eased concerns around the tower business, hence the big share price rally in the quarter. Regardless of the eventual ruling outcome, we continue to believe that Bharti Infratel will remain a strategically important asset for the industry players for many years to come.
On the other hand, China Mobile as well as the three Japanese small-cap holdings, Asante, Gakujo, and San-A, did not participate in the market rally. The Japanese names are all facing various degrees of challenges in their offline businesses due to COVID-19, but detraction from these names were fairly modest.
Notable portfolio changes:
We did not initiate any new names in the quarter as the big market rally made many stocks on our watch list less compelling. We eliminated one name, Anhui Gujing Distillery B-share, in the quarter as its share price reached our estimated intrinsic value. Its share price has more than doubled since we initiated the position in early 2017. It's a solid branded liquor business in China and we'd be happy to revisit it if its share price has a major correction.
We participated in the Fund's first IPO in the quarter, Agora Inc., a Chinese software business listed in the U.S. with the ticker API. Its ticker reveals its business model—a software application programming interface (API) business rather than a software business. Software APIs are building blocks used by software developers to produce end software products, akin to Lego pieces that kids use to build all kinds of things. In this instance, Agora's API is used to enable real-time video communications. In the parlance that's now seeped into our daily language, Agora is democratizing Zoom to enable their customers to do what Zoom does—whether their customers' app is in education, gaming, social networking, or dating, etc. On its debut day, its share price went up around 150%, which exceeded even our most optimistic scenario. We did not expect to unload our shares so soon but we could not justify holding onto them so we sold our shares on day one when its share price multiple hit 25x sales ex cash.
The COVID-19 coronavirus outbreak has brought severe impacts on human lives and unprecedented challenges to society. However, if we only looked at our stock market, it appears there are no signs of the pandemic we are going through right now. Either the market will come down to meet with humdrum corporate reality or corporate reality will have to deliver earnings growth in the midst of a partial global economic lockdown to meet the market's lofty expectations. There's no third possibility here. Impact from this pandemic will be felt long after it's gone. Therefore, we've been adjusting companies' post-COVID-19 profit level to reflect the new reality. We are looking for businesses that are structural beneficiaries of the pandemic as well as those that are temporarily hurt by the pandemic, as long as we believe there remains a meaningful gap between the share price and our estimated post-COVID intrinsic value of the business.
As of 06/30/20, the securities mentioned comprised the Matthews Asia Value Fund in the following percentages: Samsung SDI Co., 0.81%; Bharti Infratel, Ltd 6.55%; China Mobile, Ltd., 3.4%; Asante Inc., 1.8%; Gakujo Co., Ltd. 1.04%; San-A Co., Ltd, 1.20%. The Fund held no positions in Tesla, Vodafone Idea, Ltd., Anhui Gujing Distillery, Agora Inc., Lego, Zoom Current and future portfolio holdings are subject to risk and change.