Matthews China Small Companies Fund

Matthews Asia Funds

Risk Considerations

  • Investment involves risk. Past performance is not a guide to future performance. It is possible to lose the principal capital of your investment.
  • The Fund invests primarily in China-related companies. Investments in such companies may be subject to increased risks such as political, tax, economic, policy, market, liquidity, trading, custody and settlement, currency, legal and regulatory risks.
  • The Fund invests primarily in equity securities, which may result in increased volatility.
  • The Fund may invest in smaller companies, which are likely to carry higher risks than larger companies.
  • The Fund may invest in financial derivative instruments (“FDIs”). Risk associated with FDIs include counterparty/credit risk, liquidity risk, valuation risk, volatility risk and over-the-counter transaction risk. The Fund will not use FDIs extensively for investment purposes.
  • The Fund may use hedging techniques to attempt to offset certain market risks but there is no guarantee that hedging techniques will fully and effectively achieve their desired result.
  • Investors should not invest in the Fund solely based on the information in this website. Please read the Hong Kong Offering Document carefully for further details including risk factors before investing.

Period ended 30 June 2019

For the first half of 2019, the Matthews China Small Companies Fund returned 16.40%, outperforming its benchmark, the MSCI China Small Cap Index, which returned 7.99% over the same period. For the quarter ending 30 June, the Fund returned 1.09% while its benchmark fell -6.09%.

Market Environment:

Global markets were heavily influenced by geopolitics in the second quarter of 2019 following a first-quarter recovery. In May, U.S. President Donald Trump's decision to implement additional tariffs on Chinese imports surprised many market participants. All major indices in Hong Kong and China retreated from the first quarter's strong gains, which had been driven in part by a recovery in investor sentiment over macroeconomic data and also market optimism that incremental fiscal and monetary stimulus policies would further lift consumer sentiment. Such optimistic assumptions were quickly reversed by trade fears in the second quarter. Longer term, we still expect structural growth in China's economy—particularly among companies that benefit from an increase in domestic sourcing of key value-added components as the trade conflict may escalate.

From both a top-down and bottom-up perspective, we continue to anticipate long-term sustainable growth in the Chinese economy and in corporate earnings. The market's concerns over escalating trade tensions should, in our view, have little impact on China's smaller companies given their domestic focus and lower dependence on financial leverage.

Performance Contributors and Detractors:

During the second quarter of 2019, strong stock selection in the information technology and consumer staples sectors contributed most to the Fund's outperformance versus the benchmark. The biggest drag on performance came from the health care sector due to poor stock selection.

Top contributors to Fund performance during the quarter included Yihai International Holding and Asia Cement China Holdings. Yihai International Holding manufactures and sells a leading hot pot soup base and condiment brand for both restaurants and consumers. We believe the company has strong growth visibility given the popularity of its restaurant chain and its rapidly growing new business in restaurant supplies. Asia Cement China Holdings is a subsidiary of Taiwan's Asia Cement Corporation and a top producer of cement, concrete and other related products in China's Jiangxi, Hubei and Sichuan provinces. The cement industry continues to benefit from supply-side reform due to higher environmental considerations in China. The cement business is also relatively insulated from trade conflicts given the difficulty in profitably transporting such materials over long distances.

TK Group Holdings, a plastics and mold manufacturer, was a top detractor to Fund performance during both the first half of the year and in the second quarter. TK Group shares underperformed the market in the first half because the company generates a significant portion of revenues from U.S.-based technology companies. We believe the mid- to long-term position of the company remains sound, however, as it is included among new supply-chain planning outside of China. Ultimately, TK Group's customers appear to care more about quality than additional costs due to the significant yield rate differences between good and bad producers.

Notable Portfolio Changes:

During the quarter, we initiated a position in Centre Testing International Group after tracking its operational turnaround for several years. Among non-state-owned enterprises in China, the company is the leading testing and inspections provider for environmental firms, food, consumer and industrial products and electronic materials. Due to changes in management that have driven higher returns on investment for existing assets, we expect strong free cash flow generation on top of rising structural demand to benefit shareholders.

We exited our position in Shanghai Putailai New Energy Technology during the quarter as we expect China's electric vehicle material and equipment suppliers to have limited demand and pricing visibility after multiple rounds of subsidy cuts. In addition, a newly announced stimulus measure that will instead benefit internal combustion engine cars is likely to hurt electric vehicle demand.

Outlook:

We remain optimistic about China's small-cap market amid heightened market volatility as we focus rigorously on the sound fundamentals of our portfolio companies. From a macroeconomic perspective, we believe China can stabilize its economy through fiscal spending, tax reform, interest rate adjustments and currency management. In addition, we believe that steps to correct China's structural issues are on the right track, despite the near-term pains of a deleveraging economy. We are focused on finding innovative and capital-efficient small companies that are relatively insulated from macroeconomic uncertainties. We will continue to seek companies with sustainable, quality earnings streams, strong cash flows and good balance sheets that can weather uncertain economic conditions. We believe sectors such as industrial automation, health care and technology are among the most attractive from a secular growth perspective.

Annual Returns For the Years Ended 31 December
Matthews China Small Companies Fund 2018 2017 2016 2015 2014 2013 2012 2011 2010 2009
I (Acc) (USD) -18.79% 56.47% -1.96% 2.98% -3.20% 34.42% n.a. n.a. n.a. n.a.
MSCI China Small Cap Index (USD) -19.53% 24.62% -5.95% 3.48% -0.34% 18.68% n.a. n.a. n.a. n.a.

For YTD performance figures, please refer to the Quarterly and Monthly Performance pages.



 

Additional performance, attribution, liquidity, value at risk (VaR), security classification and holdings information is available on request for certain time periods.




There is no guarantee that a company will pay or continue to increase dividends.

Performance figures discussed in any of the Fund Manager Commentaries reflect that of the Institutional Accumulation Class Shares and have been calculated in USD, including ongoing charges and excluding subscription fee and redemption fee investors might have to pay. Performance details provided for the Fund are based on a NAV-to-NAV basis, with any dividends reinvested, and are net of management fees and other expenses.  Past performance information is not indicative of future performance. Investors may not get back the full amount invested.

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, including, without limitation, that the information is complete or timely. Matthews Asia and its affiliates do not accept any liability for losses either direct or consequential caused by the use of this information. 

The views and opinions discussed herein were as of the report date, subject to change and may not reflect the writer›s 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.


Sources: Brown Brothers Harriman (Luxembourg) S.C.A, Matthews Asia, FactSet Research Systems, Bloomberg