Period ended September 30, 2019
For the quarter ending Sept. 30, 2019, the Matthews Asia Value Fund returned -5.16% (Investor Class), while its benchmark, the MSCI All Country Asia ex Japan Index, returned -4.39%.
Late last year, China's President Xi Jinping and U.S. President Donald Trump met at a summit in Argentina. The cordial exchange led many to believe a trade resolution would be wrapped up in early 2019. Almost a year later, the two countries seem no closer to a comprehensive deal. In the latest negotiations, the U.S. seemed to want to restrict Chinese companies' financing in the U.S. market and place limits on U.S. pension funds' investments in Chinese companies. Whether and how these would be implemented remains to be seen. What's clear is that tensions remain high and that unrest in Hong Kong hindered trade dialogue. Against this backdrop, signs of a macro slowdown have emerged around the globe, which likely prompted the U.S. Federal Reserve to cut interest rates twice in the quarter, with a 25 basis point cut each time.
Performance Contributors and Detractors:
The Fund lagged its benchmark slightly in the third quarter, primarily due to two reasons: 1) our overexposure to South Korea hurt our performance as the country continued to be one of the worst performers in Asia in the quarter. The U.S.–China trade war and tensions with North Korea dampened enthusiasm from global investors toward the country; 2) our very little exposure to India detracted from performance as the country announced a big corporate tax cut to revive economic growth near the end of the quarter. We remained largely on the sidelines of the Indian market primarily because of our concern about elevated valuations. We continue to research selected stocks in India and maintain a watch list of potential stocks to buy if and when the market meaningfully corrects.
The biggest detractor in the third quarter, Huifu Payment, was a top performer in the first half of the year. It is one of the biggest merchant acquirers targeting micro-merchants in China. Most of its transactions happen off-line as it facilitates many small, off-line merchants to accept Alipay and WeChat Pay, third-party digital payment giants, in a way similar to how Square facilitates small, off-line merchants to accept Visa and Mastercard in the U.S. Beyond acting as a merchant acquirer, it has been transforming its model toward a more value-added service provider to merchants through software-as-a-service (SaaS) offerings. Huifu reported first-half numbers in the third quarter. Although market participants had a different opinion, given the slide in its share price since then, we viewed its earnings positively as they showed early signs of success in the company's SaaS offerings, which could make relationships with merchants stickier over time.
On the positive side, NAVER, the internet giant in South Korea, was the top performer in the quarter. NAVER is known for its dominant search engine in the country. Less known, however, is its increasing presence in e-commerce. We believe a meaningful and growing portion of its advertising revenue is driven by e-commerce. What's helped its advance is the country's still-fragmented e-commerce market with no dominant player. Its e-commerce model is more akin to Alibaba than to Amazon in the sense that it offers a marketplace without holding inventory. While historically this marketplace primarily offered an online presence for smaller merchants, big brands increasingly are setting up their flagship stores on the platform. NAVER shares were no longer a bargain, in our view, after a more than 30% run-up in the third quarter. We continued to hold our position, however, as we believed it is a decent digital franchise and that the franchise value should grow nicely over the next few years.
Notable Portfolio Changes:
We did not initiate any new positions in the quarter. The bar is now higher for us to add a new company since in recent quarters we have consolidated the portfolio down to fewer yet higher-quality companies. In the third quarter, Naspers, the South Africa-listed internet powerhouse, successfully listed its internet-assets division Prosus (which includes a 31% stake in China's Tencent) on Euronext. Through this spin-off, we now own positions in both Naspers and Prosus. According to our estimates, both were trading at a meaningful discount in terms of valuation and Naspers was trading at a bigger discount than Prosus.
Were it not for low interest rates and even negative interest rates in parts of the world, we believe global stock market valuations would be much lower. And while we do not expect a global recession, it seems closer than at any point since the financial crisis. We are not, however, positioning our portfolio for a recession. We continue to manage the portfolio using a consistent philosophy—buying quality, growing businesses at a substantial discount to our conservatively estimated intrinsic value, run by good capital allocators and with solid balance sheets. We continue to stay focused on the competitive moat of Asian business and its sustainability.
As of 09/30/2019, the securities mentioned comprised the Matthews Asia Value Fund in the following percentages: Huifu Payment, Ltd. 3.0%; NAVER Corp. 4.4%; Naspers, Ltd. 5.6%; Prosus N.V. 2.7%. The Fund held no positions in Alibaba Group Holding Ltd. (Alipay); Tencent Holdings Ltd. (WeChat); Square, Inc.; Visa Inc.; Mastercard Inc.; or Amazon.com, Inc. Current and future portfolio holdings are subject to change and risk.