For the quarter ending September 30, 2023, the Matthews China Fund (Trades, Portfolio) returned -2.45% (Investor Class) and -2.37% (Institutional Class), while its benchmark, the MSCI China Index returned -1.83%.
Market Environment:
The overall environment for China remained challenging as economic data continued to disappoint while negative news about the real estate sector re-emerged. On a more optimistic note, the cadence of policy announcements aimed at supporting China's property market and domestic consumption seems to make it clear that the government is intent on getting the economy moving again.
Geopolitical engagement between U.S. and Chinese leaders continued as the Chinese government welcomed Commerce Secretary Gina Raimondo to advance talks between the superpowers on topics with a focus on re-opening lines of communication between the two countries to resolve problematic issues surrounding trade and intellectual property. There is also the possibility of Xi Jinping will be joining President Biden at the Asia Pacific Economic Cooperation forum in November.
Performance Contributors and Detractors:
From a sector perspective both financials and communication services contributed the most to relative performance during the quarter. Financials outperformed given its defensiveness in what has still be choppy markets. Communications services outperformed given our underweight in Tencent which underperformed during the quarter. On the other hand, both industrials and real estate underperformed. The industrials sector's underperformance was led by Sungrow Power Supply Company (SZSE:300274, Financial), a solar component manufacturer, and battery maker Contemporary Amperex Technology (SZSE:300750, Financial) as the market turned more conservative on both electric vehicle (EV) and energy storage system (ESS) battery growth and demand. Real estate continued to underperformed given still a challenging time for the industry as it finds a floor on sales declines.
Among individual holidngs, Pinduoduo (PDD, Financial), one of China's largest e-commerce platforms that started its businesses with a focus on lower-tier city, price sensitive consumers directly through its interactive shopping experience, was the top contributor to performance. PDD continued to deliver strong results during the quarter in what has been a weaker eCommerce market in China. Gross merchandize value (GMV) growth and monetization for PDD has remained on track. Alibaba (BABA, Financial), the largest e-commerce platform in China was another contributor to peforamnce. The company did well given its relative defensiveness owing to cheap valuations. Pharmaceutical company Wuxi Biologics (HKSE:02269, Financial), also performed well given its relative defensiveness as one of China's health care names with larger foreign exposure. Anti-corruption efforts are currently underway in China's health care industry which makes companies with sizable domestic revenues more susceptible to any negative industry impact.
On the other hand, property developer CIFI (HKSE:00884, Financial) was the top detractor to performance. CIFI'swas recently resumed trading after a long suspension and its negative share price performance was an accumulated impact over which the time it was suspended. Consumer internet giant Tencent Holdings (HKSE:00700, Financial) was another detractor. Tencent experienced profit taking given how well the stock has held up in the earlier half of the year, and while growth has been resilient, valuations were likely on the richer side. E-commerce and logistics company JD.com (JD, Financial) also dectracted given a still weak earnings profile. We expect this year's consumer durable goods spending to remain challenged given a last year's high base last year, but feel that a lot of pessismism is currently baked into the stock.
Notable Portfolio Changes:
Overall, the portfolio maintained a consistent sector exposure. During the quarter, we slightly increased allocation to consumer discretionary as we see value in platform companies, and slightly trimmed the portfolio's A-shares with an increase in U.S. ADRs driven by the addition of good quality names such as fast food restaurant company YUM China (YUMC, Financial) and travel serices company Trip.com (TCOM, Financial). At the end of the quarter, the portfolio was overweighted versus the benchmark in financials given the portfolio's capital market reform plays, that we believe will be beneficial from equity market deepening and slightly underweighted information technology given relatively high valuation and maintained zero exposure to materials as we haven't found as many compelling ideas in this more cyclical part of the Chinese market. Many materials and mining companies also have environmental, social and governance (ESG) concerns.
Outlook:
China continues to be grinding its way through a slow economic recovery with continues challenges including a weak property market, weak global demand and weak business confidence. While the government has not offered any bazooka stimulus, more support for the property market was seen in throughout the quarter ending in September. Portfolio Managers believe the government continues to be in a position to support its economy further if needed.
Looking into the final quarter of the year, it is hard to see a major recovery in economic growth although comparables will be more favorable. Portfolio Managers will look for the bottoming of the property market and increased efforts to boost business confidence. All in, things are not collapsing but Portfolio Managers are mindful that major catalysts for recovery remain at bay given all of the above, and a still challenging geopolitical environment.
All performance quoted is past performance and is no guarantee of future results. Investment return and principal value will fluctuate with changing market conditions so that shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the return figures quoted. Returns would have been lower if certain of the Fund's fees and expenses had not been waived. Please see the Fund's most recent month-end performance.
