The Matthews Asia Small Companies Fund (Trades, Portfolio), part of San Francisco-based investment firm Matthews International Capital Management, disclosed 20 new positions in its first-quarter portfolio, which was released earlier this month.
Managed by Tiffany Hsiao and Beini Zhou, the fund invests in smaller companies across Asia, with the exception of Japan, that are capable of sustainable growth based on several fundamental characteristics. Its primary goal is long-term capital appreciation.
Based on these criteria, the fund’s top five buys for the quarter were InnoCare Pharma Ltd. (HKSE:09969, Financial), AfreecaTV Co. (XKRX:067160, Financial), JOYY Inc. (WBO:JOYY, Financial), Zai Lab Ltd. (ZLAB, Financial) and Hangzhou Onechance Tech Corp. (SZSE:300792, Financial).
The fund invested in 1.85 million shares of InnoCare Pharma, allocating 2.18% of the equity portfolio to the stake. The stock traded for an average price of 10.41 Hong Kong dollars ($1.34) per share during the quarter.
The Chinese clinical-stage biopharmaceutical company, which went public in March, has an HK$18.83 billion market cap; its shares were trading around HK$14.48 on Friday.
The price chart shows the stock has gained approximately 40% since its initial public offering.
GuruFocus rated InnoCare’s profitability 3 out of 10 on the back of a cash-debt ratio of 1.99, which is at a historical high for the company despite underperforming nearly 70% of other companies in its industry.
The company is also being weighed down by negative margins and returns.
The Small Companies Fund holds 0.14% of InnoCare’s outstanding shares.
Matthews picked up 50,587 shares of AfreecaTV, dedicating 1.74% of the equity portfolio to the holding. Shares traded for an average price of 56,240.8 won ($46.10) during the quarter.
The South Korean video streaming service has a market cap of 643.92 billion won; its shares closed at 59,200 won on Thursday with a price-earnings ratio of 19.33, a price-book ratio of 5.61 and a price-sales ratio of 3.95.
The Peter Lynch chart shows the stock is trading above its fair value, suggesting it is overpriced. The GuruFocus valuation rank of 4 out of 10 also supports this assessment.
AfreecaTV’s financial strength was rated 8 out of 10 by GuruFocus on the back of a high cash-debt ratio and a comfortable level of interest coverage. The high Altman Z-Score of 6.05 also indicates the company is in good standing and not at risk of going bankrupt.
The company’s profitability scored a 9 out of 10 rating, driven by an expanding operating margin, strong returns that outperform a majority of industry peers and a moderate Piotroski F-Score of 5, which implies operations are stable. It also has a business predictability rank of one out of five stars. According to GuruFocus, companies with this rank typically return an average of 1.1% per annum over a 10-year period.
The fund holds 0.46% of the AfreecaTV’s outstanding shares.
The Asia Small Companies Fund established a 37,600-share position in JOYY, giving it 1.61% space in the equity portfolio. The stock traded for an average per-share price of 52.62 euros ($57.16) each during the quarter.
The Chinese social media company has a market cap of 3.98 billion euros; its Wiener Börse-listed shares closed at 50.5 euros on Thursday with a price-earnings ratio of 7.62, a price-book ratio of 0.92 and a price-sales ratio of 1.15.
According to the Peter Lynch chart, the stock is undervalued.
GuruFocus rated JOYY’s financial strength 7 out of 10 despite having low interest coverage and, at 2.85, the Altman Z-Score indicates it is under some pressure since its Sloan ratio suggests it has poor earnings quality and assets are building up at a faster rate than revenue is growing. The return on invested capital is also below the weighted average cost of capital, which implies it has become less efficient.
The company’s profitability scored an 8 out of 10 rating. Even though its margins are in decline, JOYY is supported by returns that outperform a majority of competitors and a one-star business predictability rank. It also has a low Piotroski F-Score of 2, which suggests operating conditions are in poor shape.
The fund holds 0.05% of JOYY’s outstanding shares.
The fund purchased a 35,700-share holding of Zai Lab, expanding the equity portfolio by 1.48%. The stock traded for an average price of $52.10 per share during the quarter.
The biopharmaceutical company, which is based in both the U.S. and China, has a $4.9 billion market cap; its shares were trading around $66.14 on Friday with a price-book ratio of 15.11 and a price-sales ratio of 332.83.
Based on the price-sales chart, the stock appears to be overvalued since it is trading near a three-year high.
Boosted by comfortable interest coverage and a robust Altman Z-Score of 45.31, Zai Lab’s financial strength was rated 5 out of 10 by GuruFocus.
The company’s profitability did not fare as well, scoring a 1 out of 10 rating on the back of negative margins and returns that underperform a majority of industry peers.
Of the gurus invested in Zai Lab, Ron Baron (Trades, Portfolio) has the largest stake with 2.95% of outstanding shares. Jim Simons (Trades, Portfolio)’ Renaissance Technologies also has a position in the stock.
Hangzhou Onechance Tech
The Asia Small Companies Fund bought 47,325 shares of Hangzhou Onechance Tech, impacting the equity portfolio by 1.21%. During the quarter, shares traded for an average price of 215.02 yuan ($30.40) each.
The Chinese company, which provides electronic commerce services like merchandise control, marketing promotions, customer service, warehouse logistics and platform distribution, has a market cap of 23.61 billion yuan; its shares were trading around 290.18 yuan on Friday with a price-earnings ratio of 91.08, a price-book ratio of 18.85 and a price-sales ratio of 15.44.
The Peter Lynch chart suggests the stock is overvalued.
On the back of no long-term debt and adequate interest coverage, Hangzhou Onechance’s financial strength was rated out of 10 by GuruFocus.
The company’s profitability scored a 5 out of 10 rating on the back of margins and returns that outperform a majority of competitors.
The fund holds 0.06% of Hangzhou Onechance’s outstanding shares.
Additional trades and portfolio performance
During the quarter, Matthews also established positions in several other companies, including Longchen Paper & Packaging Co. Ltd. (TPE:1909), Win Semiconductors Corp. (ROCO:3105), Accton Technology Corp. (TPE:2345), Koh Young Technology Inc. (XKRX:098460) and Airtac International Group (TPE:1590).
Over 40% of the Asia Small Companies Fund’s $124 million equity portfolio, which is composed of 76 stocks, is invested in the technology and health care sectors.
According to its fact sheet, the fund returned 17.38% in 2019, outperforming the MSCI All Country Asia ex. Japan Small Cap Index’s 7.58% return.
Disclosure: No positions.
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