For the quarter ending 31 March 2015, the Matthews China Fund returned 5.09% while its benchmark, the MSCI China Index, 8.12%.
Matthews China Fund: Market Environment
During the first quarter, China’s macroeconomics and the stock market headed in two different directions. On the macro side, major economic indicators continue to paint a negative picture on the growth momentum in the country. To stabilize the economy from further weakness, the central bank reacted more proactively by cutting the bank reserve ratio for the first time since 2012. A second interest rate cut since last year was also conducted during the quarter.
Chinese equity markets, especially the domestic A-share market, responded positively on the monetary easing trend. Supported mostly by Fund flows from domestic retail investors, China’s A shares reached a seven-year high during the period. Meanwhile the Hong Kong listed Chinese equities also moved higher, albeit less significantly compared to the A shares.
Matthews China Fund: Performance Contributors and Detractors
Technology-related companies, such as Tencent Holdings and Kingdee International Software Group, contributed positively to the Fund’s overall performance during the quarter. Tencent continued to deliver strong earnings through continued progress in monetizing its popular mobile messenger platform called WeChat. Kingdee’s outperformance was largely due to its foray into the fast-growing cloud computing business as well as a more positive outlook on the improvement of its core business following a two-year restructuring period. Consumer staples companies, such as China Mengniu and Hengan International Group, also did well as they benefited from lower input costs. While it may be difficult to predict how raw material costs will trend, we continue to believe in the longer-term theses that these two companies will continue to enjoy margin expansion on the back of offering higher margins and differentiated products.
Performance detractors for the Fund include consumer discretionary companies such as HomeInns Hotel Group and Alibaba. HomeInns, the largest budget hotel operator in China, suffered from the inability to raise room rents due to a weak macroeconomic environment where both leisure and business travelers travelled less. Alibaba’s performance over the quarter was also lackluster owing to concerns of the lack of product authenticity after a survey released found that only a small sample of merchandise from its Taobao website was found to be authentic.
Matthews China Fund: Notable Portfolio Changes
Over the quarter, the Fund added to a new position, China Everbright International. This company operates in the environmental protection industry and focuses on industrial waste-to-energy projects as well as waste water treatment ventures. We believe that China’s severe pollution signals a real demand for such environmental protection services. Amongst the many players, China Everbright is one of the market leaders and has demonstrated its ability to win contracts in China’s larger and more affluent cities.
The Fund also exited its position in Kunlun Energy, which it originally held with the expectation of rapid growth in liquefied natural gas trucks and refueling stations. Over time, however, a combination of a weak macro economy, low oil prices and poor operational execution led to the underperformance of the company.
Matthews China Fund: Outlook
Given that there are no strong signs of macroeconomic recovery so far this year, we believe further monetary easing and fiscal stimulus will be carried out by the central government later in the year. As the Chinese premier pointed out during the National People’s Congress, China has a full “tool kit” at its disposal and will use them if growth nears the lower end of its guidance. From recent companies’ earnings results and our on-the-ground site visits, we notice that generally the operating environment on the corporate side is starting to improve given the lower energy and raw material costs as well as easing monetary conditions. We continue to stick to our approach of finding long term winners in various Chinese industries with a focus on the domestic consumption and service sectors.
The views and opinions in this commentary were current as of 31 March 2015. 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.
Via Matthews Asia