The Matthews China Fund (Trades, Portfolio) purchased three new stocks and sold out of two positions — all traded on the Hong Kong stock exchange — according to GuruFocus Real Time Picks.
The Matthews China Fund (Trades, Portfolio) seeks long-term capital appreciation by investing in Chinese stocks, including its administrative districts such as Hong Kong.
During the first quarter, the fund returned 6.9%, underperforming the MSCI China Index return of 8.12%. In the fund’s quarterly commentary, the fund managers noted that in terms of market environment, they believe further monetary easing and fiscal stimulus will be implemented later in the year.
“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,” the managers wrote.
New buys
China Everbright International (HKSE:00257, Financial)
The largest purchase during the quarter was 8,780,000 shares of China Everbright for an average price of HK$11.45 per share. The new holding accounts for 1.5% of the portfolio.
The fund believes China’s severe pollution signals a demand of China Everbright’s 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 managers wrote.
China Everbright is an integrated project investment, operation management, technology development, and equipment manufacturing business. The stock has increased 47% over the past year and now trades at HK$14.66, with a P/E ratio of 38.9 and P/S ratio of 10.42.
GuruFocus rates the company’s business predictability as 3 out of 5 stars due to consistent earnings and revenue. The DCF calculator, which relies on this business predictability, estimates a fair value of HK$10.82, giving a -35% margin of safety.
Over the past five years, the company’s net income has increased by almost 28%, recording at HK$1,765 million in 2014.
The current dividend yield is 0.68%, while the payout ratio is 26%.
Luye Pharma Group (HKSE:02186, Financial)
The fund also purchased 5,494,440 shares of Luye Pharma for an average price of HK$9.03. The new holding has a 0.68% portfolio weighting. The company is a specialty pharmaceutical firm that has launched about 30 products in oncology, cardiovascular, gastroenterology, and central nervous system areas with independent intellectual property.
The stock price has been up 48% over the past year and now trades at HK$9.44. The current P/E ratio is 39.2, while the P/S ratio is 7.52.
Over the past five years, EBIT per share has declined about 11%, recording at HK$0.32 in 2014.
One good sign is that Luye Pharma’s operating margin is gradually expanding, increasing by 8.15% over the past five years. In 2014, the margin recorded at 24.25%.
CGN Power Co (HKSE:01816, Financial)
Matthews China’s smallest purchase during the first quarter was 475,000 shares in CGN Power for an average price of HK$3.21 per share.
China General Nuclear Power Group, or CGN Power, is a large clean energy group. As of May 2014, the company’s operating nuclear generating units reached 11,620 MWe, with 13 other nuclear generating units under construction.
CGN’s net income was HK$8,614 million in 2014, up from HK$6,474 million the year before. The balance sheet is healthy with a current ratio of 1.79, indicating the company can easily cover its short-term obligations. However, long-term debt jumped from HK$77,516 million in 2013 to HK$85,452 million in 2014.
Sold out
Kunlun Energy Co (HKSE:00135, Financial)
The fund sold out of 13,118,000 shares in Kunlun Energy for an average price of HK$7.67 per share.
Kunlun is a crude oil and natural gas company that operates in China, Kazakhstan, Oman, Peru, Thailand, and Azerbaijan. The stock price has declined 23% over the past year and now trades at HK$9.13 per share. The current P/E ratio is 13.4 and the P/S ratio is 1.56.
In 2014, net income was HK$8,876 million, which was a decrease from HK$10,508 million the year before. However, over the past five years, net income increased by 9.67%.
In the Q1 shareholder letter, the fund managers wrote that they initially expected 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,” the managers wrote.
Kunlun’s dividend yield is 2.48%, while the payout ratio is 33%.
Shangri-La Asia Ltd (HKSE:00069)
The fund’s other divestiture was 3,989,400 shares for an average price of HK$10.43 per share. The company owns and operates hotels and other properties in countries such as Hong Kong, China, Singapore, Philippines, and Japan.
The stock declined 5% over the past year and is currently priced at HK$12.08, with a P/E ratio of 26.3 and P/S ratio of 2.26.
GuruFocus rates the company’s business predictability as 4 out of 5 stars. The DCF calculator projects a fair value of HK$3.94, which gives a margin of safety of -207%.
Over the last five years, net income has declined 3.74%, and reported at HK$1,608 million in 2014.
The company’s current dividend yield is 0.85%, which is close to the three-year low. The payout ratio is 22%.
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