In a challenging global market, the Matthews China Fund (Trades, Portfolio) disclosed it established four new positions when it reported its fourth-quarter 2018 portfolio.
According to its fact sheet, the fund seeks long-term capital appreciation through investments in companies capable of sustainable growth based on fundamental characteristics like balance sheet information and cash flow stability. The fund’s new buys were China International Travel Service Corp. Ltd. (SHSE:601888, Financial), 58.com Inc. (WUBA, Financial), Wanhua Chemical Group Co. Ltd. (SHSE:600309, Financial) and iQiyi Inc. (IQ, Financial).
Fund updates performance in a challenging global market
The fund said in its letter several headwinds, including deteriorating U.S.-China relations amid the trade war and trepidation about increasing interest rates contributed to a -12.51% return for the quarter, underperforming the MSCI China Index return of -10.73%. Despite this, the fund has returned an average 8.86% per year since its Feb. 19, 1998 inception.
According to the fund’s letter, top detractors included Brilliance China Automotive Holdings Ltd. (HKSE:01114, Financial), a company that suffered a “deep-selloff” on the announcement the company would sell its 25% stake in the Bayerische Motoren Werke AG (XTER:BMW) joint venture at a price below analyst expectations. Despite the price drop, the fund added 2.508 million shares for an average price of 7.2 Hong Kong dollars (92 cents) per share during the quarter.
Top buy: China International Travel Service
The fund invested in 1,366,478 shares of China International Travel Service, giving the position 1.96% equity portfolio weight. Shares averaged 57.94 yuan ($8.65) during the quarter.
The fund said in its letter China International Travel Service, a major operator of duty-free shops in China, directly benefits from secular growth in China’s middle-class and tourism business. Matthews China sees growth potential in the company’s Hainan Island operations, further boosted by the increased quota from 16,000 yuan to 30,000 yuan.
GuruFocus ranks China International Travel Service’s profitability 8 out of 10 on several positive investing signs, which include a strong Piotroski F-score of 7 and operating margins that have increased approximately 7% per year over the past five years.
58.com
The fund invested in 125,700 shares of 58.com, giving the position 1.11% equity portfolio space. Shares averaged $60.56 during the quarter.
Known for its platform “Wuba Tongcheng,” 58.com operates an online marketplace where local merchants and consumers connect, share information and conduct business. GuruFocus ranks the company’s financial strength 7 out of 10 on several positive indicators, which include an Altman Z-score of 4.67, a cash-to-debt ratio of 7.45 and a debt-to-equity ratio of 0.04. 58.com’s debt ratios rank higher than approximately three-quarters of global competitors, suggesting a strong balance sheet.
Other gurus with large positions in 58.com include First Pacific Advisors (Trades, Portfolio) and Pioneer Investments (Trades, Portfolio).
Wanhua Chemical
The fund invested in 1,465,700 shares of Wanhua Chemical, giving the position 0.98% equity portfolio weight. Shares averaged 31.9 yuan during the quarter.
Wanhua Chemical develops and produces MDI-based isocyanate, aromatic polyamine products and thermoplastic polyurethane elastomers products. GuruFocus ranks the company’s profitability 10 out of 10 on several positive indicators, which include a Piotroski F-score of a perfect 9 and operating margins that have increased approximately 4.10% per year over the past five years and are outperforming over 97% of global competitors.
Wanhua Chemical’s business predictability ranks 4.5 stars out of five on strong and consistent revenue and earnings growth over the past five years. Even though the company’s revenue growth lags its asset growth, suggesting potential inefficiency, Wanhua Chemical’s three-year revenue growth rate of 24% ranks higher than 93% of global chemical manufacturers.
iQiyi
The fund invested in 175,800 shares of iQiyi, a company that offers a wide range of internet video content. Shares averaged $20.66 during the quarter.
See also
The fund’s top position boost for the quarter was New China Life Insurance (HKSE:01336), a position to which the fund added 1.496 million shares for an average price of HK$35.62. With this transaction, the fund increased its equity portfolio 0.97%.
New China Life Insurance operates business segments that include individual insurance, group insurance and other. The company has a strong balance sheet, with a cash-to-debt ratio of 4.83 and a debt-to-equity ratio that ranks higher than 81% of global competitors.
Disclosure: No positions.
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