Period ended September 30, 2014
For the quarter ending September 30, 2014, the Matthews China Fund (Trades, Portfolio) fell -1.29%, underperforming its benchmark, the MSCI China Index, which returned 1.53%.
Market Environment:
During the third quarter, China’s equity market environment turned from bullish to bearish. The strong macroeconomic indicators that were released in June proved somewhat short-lived, and the statistics in July and August showed that the economy continued to be weak. The lack of growth momentum was mainly due to a continued sluggishness in the property markets and the slowing of the government’s fixed asset investments in infrastructure. Meanwhile, the government refrained from launching large-scale stimulus programs to spur short-term economic growth, instead continuing with its approach to help stimulate only targeted areas.
Performance Contributors and Detractors:
During the quarter, the health care sector was the biggest contributor to Fund performance. Health care companies overall reported strong earnings in the first half, showing continued growth momentum. Among our health care holdings, Sinopharm Group (HKSE:01099, Financial), one of China’s largest pharmaceutical products distributors, and Sino Biopharmaceutical (HKSE:01177, Financial) were top contributors. We believe Sinopharm is among the strongest firms in its industry, and benefits most from the sector’s rapid growth. Sino Biopharmaceutical has been focusing on new drug R&D, and its efforts are paying off as the company has found solid contribution from new products.
Fund performance in the consumer discretionary and consumer staples sectors continued to be disappointing, and were the biggest detractors of relative performance. Among them, Sands China (HKSE:01928, Financial), a major casino operator in Macau, fell under continued selling pressure during the quarter as near-term revenues were negatively affected by China’s anti-corruption campaign. Other consumer names like budget hotel operator Home Inns & Hotels Management (HMIN, Financial) and dairy producer China Mengniu Dairy (HKSE:02319, Financial) were also among the biggest detractors. The weakness in the consumer names became more prolonged than many investors had expected. We continue to hold on to solid names in the industry and our conviction in the long-term potential of the country’s consumer sectors remains unchanged.
Notable Portfolio Changes:
During the quarter, we exited China Resources Enterprise as we believed the company has been less competitive in its supermarket and hypermarket operations. We also sold Li Ning (HKSE:02331), the sports shoes and apparel manufacturer, due to its disappointing turnaround strategy. However, quite notably, we added e-commerce giant Alibaba to the portfolio during the quarter following its much-awaited initial public offering. We like Alibaba (BABA), given its strong market position. We also added our first position in a domestic A-share holding to the portfolio—Hangzhou Hikvision Digital Technology. This is China’s leading maker of video surveillance cameras, and has a wide-ranging product portfolio amid a rapidly developing industry.
Outlook:
Looking forward, we expect the central government to carefully achieve a balance between non-intervention and major stimulus programs. Given the current weak economic environment, we expect more accommodative policies to be adopted to prevent the economy from further slowing. The government has been making efforts to accelerate the reform process by encouraging and supporting the private sector economy, and increasing the role of the market forces. Capital market reform is also high on the agenda. In October, China is scheduled to launch a platform between the stock exchanges of Hong Kong and Shanghai, allowing mutual trading activities between the two exchanges. We believe this is a major step forward in capital market reform and should create good opportunities for foreign investors to access the domestic market.
The views and opinions in this commentary were current as of September 30, 2014. 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.
Statements of fact are from sources considered reliable, but neither the Funds nor the Investment Advisor makes any representation or guarantee as to their completeness or accuracy.
As of 9/30/2014, the securities mentioned comprised the Matthews China Fund (Trades, Portfolio) in the following percentages: Sinopharm Group Co., Ltd. 3.2%, Sino Biopharmaceutical, Ltd. 2.0%, Sands China, Ltd. 1.9%, Home Inns & Hotels Management, Inc. 2.1%, China Mengniu Dairy Co., Ltd. 2.3%, Alibaba Group Holding, Ltd. 0.8%, Hangzhou Hikvision Digital Technology Co., Ltd. 0.9%.The Fund held no positions in China Resources Enterprise, Ltd. or Li Ning Co., Ltd. Current and future portfolio holdings are subject to risk.
Performance and distribution figures discussed in any of the Manager Commentaries reflect that of the Investor Class Shares.
