The Matthews China Fund (Trades, Portfolio), seeks long-term capital appreciation through investments in Chinese companies with sustainable growth possibilities. The fund added four technology positions during the first quarter: Midea Group Co. Ltd. (SZSE:000333, Financial), ZTE Corp. (HKSE:00763, Financial), China Unicom (Hong Kong) Ltd. (HKSE:00762, Financial)(CHU, Financial) and Chinasoft International Ltd. (HKSE:00354, Financial).
Midea Group
The fund invested in 2,146,696 shares of Midea Group, a household electronics company engaged in the manufacturing of air conditioners, refrigerators and washing machines. The company’s share price averaged 31.32 Chinese yuan ($4.55) during the quarter. The fund increased its portfolio 1.83% with this transaction.
Midea Group reported revenues of 159.8 billion yuan and net profits of 15.9 billion yuan in 2016, outperforming 2015 results by 15% and 16%. According to the company’s annual report, Midea made strong progress in company efficiency and asset structure, both contributing to higher market value. The company paid 6.5 billion yuan in dividends during the year.
Despite poor Piotroski F-scores, Midea Group’s operating margin is near a 10-year high and outperforms 81% of global consumer electronics companies.
ZTE
The fund added 3.96 million shares of ZTE Corp. at an average price of 12.86 Hong Kong dollars ($1.65). With this transaction, the fund increased its portfolio 1.28%.
ZTE offers modest growth potential as its financial strength and profitability both rank 5 out of 10. The company’s Piotroski F-score ranks a weak 2 out of 9, which usually implies poor business operation. Despite this, the telecommunication equipment company reported a 17.78% year-over-year increase in operating revenue and a 27.81% year-over-year increase in net profit attributable to shareholders according to its first-quarter report. These results contributed to an operating margin of 1.54%.
China Unicom
The fund added 4.634 million shares of China Unicom, one of the largest Chinese wireless companies. The company’s share price averaged 9.45 Hong Kong dollars during the quarter.
Although the company’s profitability ranks 6 out of 10, China Unicom has four severe warning signs, including declining operating margins and revenue per share. The company’s revenue and gross profit steadily decreased since 2014.
Despite low financial strength and profitability, China Unicom has a strong Piotroski F-score of 7, driven by higher share buybacks and increasing gross margins during the past five quarters. The company’s three-year share buyback ratio and gross margin outperform 69% and 86% of global competitors.
Chinasoft International
The fund invested in 10.268 million shares of Chinasoft International at an average price of 3.92 Hong Kong dollars per share.
Chinasoft International has a profitability rank of 8, suggesting good growth potential. The company’s operating margin is near a 10-year high of 10.17% and outperforms 69% of global competitors.
According to its 2016 annual report, the information technology services company reported comprehensive income of 429,330,000 yuan for full-year 2016, approximately 82,755,000 yuan higher than its full-year 2015 comprehensive income. Diluted earnings per share increased 0.062 yuan.
See also
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Disclosure: The author has no positions in the stocks mentioned.
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