Matthews China Makes 5 New Investments Despite Weak Market

The Matthews China Fund (Trades, Portfolio) seeks long-term capital appreciation by investing at least 80% of total assets in China, including other districts such as Hong Kong. The fund is led by new portfolio manager Andrew Mattock, who joined the firm in 2015.

For the full year 2015, Matthews China returned 2.41%, outperforming the benchmark MSCI China Index, which declined 7.62%. During the fourth quarter, the fund returned 10.33%, also outperforming the benchmark’s 4.03% return.

China’s struggling economy and market conditions recently have been no stranger to the scrutiny of investors and the global market. In its year-end commentary, Matthews China wrote that the “heavy handed” approach used by authorities to manage the decline has concerned investors, and China’s move to adjust the mechanism for the daily setting of exchange rates caused much confusion. Still, this may be a positive development in the long term.

“Onshore foreign exchange deposits in China have not increased with any significance, which may suggest a healthy adjustment is taking place,” the fund wrote. “Our central case is that 2016 will be similar to 2015 in that we believe the economy should continue to shed excess capacity in some industries and associated nonperforming loans will be recognized. So far, this adjustment has been orderly, and we believe this will continue to be the case.”

Fuyao Glass Industry Group Co. Ltd. (SHSE:600660, Financial)

The fund’s largest new buy was 6,640,207 shares in Fuyao Glass at an average price of ¥14.04 per share. Fuyao produces automobile and architectural safety glass, as well as bulletproof and other industrial glass products in China.

GuruFocus rates the company’s business predictability as 4 out of 5 stars, and Fuyao is currently priced at 11.6x earnings. In the third quarter, the company reported diluted EPS of ¥0.25, on par with EPS of ¥0.27 in the year-ago quarter. Annual diluted EPS has had an upward trend over time.

Fuyao pays a dividend yield of 5.81% with a 68% payout ratio.

Shanghai Lujiazui Finance & Trade Zone Development (SHSE:900932, Financial)

Matthews China also purchased 3,735,686 shares in Shanghai Lujiazui, which traded for an average of $3.54 during the period. The development company is involved in land, hotel and property leasing and management.

The stock has risen 38% over the past year and currently trades at a high valuation at 41x earnings. Over the past five years, revenue per share has grown at an average annual rate of 9.6%, while EPS grew by 6.2%.

The 12.85% dividend yield is currently unsustainable for Shanghai Lujiazui due to its low earnings. This is indicated by the high payout ratio of over 280%.

CITIC Securities Co. Ltd. (HKSE:06030, Financial)

The fund bought 6,437,500 shares in CITIC Securities, which provides financial products and services, for an average of HK$17.66 per share. Over the past year, CITIC’s stock has tanked 39% and currently trades at just 8x earnings.

After a large decline in FY 2012, the company’s annual EPS has been increasing each year since.

CITIC pays a dividend yield of 2.39% with a 15% payout ratio.

Shanghai Oriental Pearl Media Co. Ltd. (SHSE:600637, Financial)

Matthews China purchased 2,316,008 shares in Shanghai Oriental Pearl Media for an average of ¥35.78 per share. The company produces digital optical TVs, plasma TVs, IT products and related products.

The stock is down 35% over the past year and traded at ¥25.73 as of Monday afternoon, or 30x earnings. In the third quarter, the company had EPS of CN¥0.43, up from CN¥0.26 in the year-ago quarter.

Shanghai Oriental Pearl Media has kept its operating margin levels above at least 20% since 2011, its largest margin over the past 15 years.

The company pays a trailing dividend yield of 0.43% and a forward yield of 0.86%.

SITC International Holdings Co. Ltd. (HKSE:01308)

The fund’s fifth new investment was 13,886,000 shares in SITC International, which traded for an average of HK$3.97 during the quarter. SITC is a shipping logistics company whose scope covers container liner shipping, freight forwarding and customs clearance.

Over the past year, the stock has declined 15% and currently trades at 10x earnings. Over the past five years, revenue per share has grown by an average annual rate of 14.2%, compared to 21% for EPS.

The dividend yield is 3.31% with a 30% payout ratio.

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