Matthews Asia Value Fund


Period ended March 31, 2020

For the quarter ending March 31, 2020, the Matthews Asia Value Fund returned -17.81% (Investor Class), while its benchmark, the MSCI All Country Asia ex Japan Index, returned -18.36%.

Market Environment:

“There are decades where nothing happens, and there are weeks where decades happen.” Vladimir Lenin's observation aptly describes the first three months of 2020. No country was prepared for a global pandemic, and no country was prepared for suddenly stopping a big chunk of its economy. It was a dramatic turn of events following double-digit gains for gold, oil, bonds and major stock markets around the world in 2019. For value investors, market panics can be a prime opportunity for buying high-quality businesses whose stock prices are temporarily distressed.

Asian equities, along with global markets, were down sharply in the first quarter. Investor sentiment declined as worries surrounding the spread of the coronavirus (Covid-19) moved from North Asia to Europe and the U.S. The virus then continued its journey to South Asia, including India. Market prices suffered in tandem with the spread of the virus.

China's equity markets held up relatively well even though the country was the epicenter of the pandemic. Chinese authorities limited internal travel, controlling its borders while working with world health organizations to control the outbreak. The numbers in new virus cases slowed and comprehensive policy action helped stabilize sentiment within Chinese markets. However, less developed markets, such as Indonesia and the Philippines, experienced greater currency depreciation and equity share price declines.

Performance contributors and detractors:

The Fund's high percentage held in cash contributed to relative performance, as did stock selection in the information technology sector. Among individual securities, South Korean battery and energy storage manufacturer Samsung SDI was a contributor. A Samsung group affiliate, the company is one of the biggest EV (electric vehicle) battery makers in the world. The company's 2019 full year earnings announcement in the beginning of the year signaled a strong improvement expected in profitability of their EV battery business. Following significant appreciation in the share price, we trimmed our position substantially. Another contributor was Shandong Weigao, a Hong Kong-listed company selling medical consumables in China. The company's core products include small-ticket items such as needles and syringes. In the near term, their business related to elective surgeries is being impacted by the coronavirus in China. In the long term, we believe they are well positioned to continue to capture market share driven by ongoing import substitution.

The Fund's overweight to industrials was a detractor in the reporting period. Among individual securities, Hong-Kong based conglomerate CK Hutchison was also a detractor. The company's revenue streams come from telecom, infrastructure, ports and retail. We expect the company's profits to be impacted by the pandemic, but we believe this is already represented in its share price. We believe their income diversification and exposure to utility-like businesses such as telecom and infrastructure will help them weather through this downturn. Elsewhere, the Japanese recruitment business Gakujo also detracted from performance. Recruiting businesses are among the most sensitive to changes in macroeconomic conditions. In the short term, their business will likely get impacted substantially, but we remain constructive on the company long term.

Notable portfolio changes:

After not adding any new stocks for several prior quarters, we initiated three new positions in the quarter. We went back into Richemont, the Swiss-listed global luxury goods maker that owns coveted brands such as Cartier and Van Cleef & Arpels, after we sold out of the name back in 2018. Their business will clearly take a hit in the short term but we believe their brand power will stay and continue to grow in the long run. We are happy to have accumulated their shares at low-to-mid-teen times their medium-term earnings power.
 
We also initiated a position in Bharti Infratel, India's largest telecom tower business with significant market share. The company is affiliated with Bharti Airtel and Vodafone Idea, two of the three major mobile service providers in the country. During the quarter. India's Supreme Court ruled for the two mobile telecom carriers to pay back the tax dues owed to the government. If this ruling is executed, there is likelihood for Vodafone Idea to go bankrupt given its levered balance sheet. This possibly creates an enormous amount of fear in the market on Bharti Infratel given  the distinct possibility that one of their major customers that accounts for close to half of the company's revenue would go bust. However, we believe there are overwhelming odds that the government may be disinclined to allow a three-player market turn into a two-player market and therefore a special ordinance may be issued to support Vodafone Idea.
 
On the other hand, we exited seven positions in the portfolio, taking advantage of market volatility to upgrade the portfolio to fewer higher-quality names. We ended the quarter with 28 names, maintaining a very concentrated portfolio. We sold out Naspers, listed in South Africa, and shifted part of the money to Prosus, which was recently spun off from Naspers and is listed in Amsterdam, to keep our exposure to their underlying asset in Tencent, since we grew increasingly concerned about having currency exposure to South African rand.

Outlook:

Looking ahead, much remains uncertain about how the global pandemic will continue to unfold, as well as the scope of its economic impact. Predictions tell you more about the predictors themselves than what's being predicted. We believe humility and patience are required. In the near term, we see the potential for additional economic disruption and market volatility. Over the long term, we expect many economic activities to gradually resume. With significant cash on hand, we remain well positioned to take advantage of market dislocations, investing with a keen eye for value. We continue to focus on good businesses with strong balance sheets and attractive long-term prospects. We are not market timers, but rather seek to find attractive value in every market environment. By investing in companies when share prices are more attractively valued, we find better potential for returns across a full market cycle.


As of 03/31/20, the securities mentioned comprised the Matthews Asia Fund in the following percentages: Samsung SDI Co., Ltd., Pfd. 2.7%; CK Hutchison Holdings, Ltd. 7.1%; Shandong Weigao Group Medical Polymer Co., Ltd. 2.1%; Gakujo Co., Ltd. 1.3%; Cie Financiere Richemont SA, 8.6%; Bharti Infratel, Ltd. 4.9%. The Fund held no positions in Bharti Airtel, Ltd., Vodafone Idea, Ltd., Naspers Ltd., or Tencent Holdings, Ltd. Current and future portfolio holdings are subject to risk.



 

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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.