Matthews China Fund Establishes 8 Positions in 2nd Quarter

Market-beating fund releases quarterly portfolio

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Aug 07, 2018
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The Matthews China Fund (Trades, Portfolio), part of Matthews Asia, disclosed it established eight new positions when it released its second-quarter portfolio.

According to its fact sheet, the fund, which is managed by Andrew Mattock, Winnie Chwang and Henry Zhang, seeks to achieve long-term capital appreciation by investing heavily in Chinese companies that are capable of producing sustainable growth.

While the fund has previously held stakes in two of the companies, the other six stocks it snatched up during the quarter were new to the portfolio. New inductees were SJM Holdings Ltd. (HKSE:00880, Financial), Ping An Healthcare and Technology Co. Ltd. (HKSE:01833, Financial), China Jushi Co. Ltd. (SHSE:600176, Financial), YY Inc. (YY, Financial), Beijing New Building Materials PLC (SZSE:000786, Financial) and Guangzhou Baiyun International Airport Co. Ltd. (SHSE:600004).

SJM Holdings

The China Fund invested in 11.8 million shares of SJM Holdings for an average price of 8.95 Hong Kong dollars ($1.14) per share, giving the stake 1.43% space in the equity portfolio.

The company, which operates casinos in Macau, has a market cap of HK$49.52 billion; its shares closed at HK$8.75 on Monday with a price-earnings ratio of 25, a price-book ratio of 1.95 and a price-sales ratio of 1.92.

The Peter Lynch chart below shows the stock is trading above its fair value, suggesting it is overpriced.

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SJM’s financial strength was rated 7 out of 10 by GuruFocus. While the company has issued approximately HK$7.2 billion in new long-term debt over the last three years, it is still at a manageable level due to high interest coverage. The Altman Z-Score of 2.3, however, indicates the company is under some financial pressure.

The company’s profitability and growth did not fare as well with a score of 4 out of 10. While SJM is weighed down by a declining operating margin, it still outperforms 55% of competitors. The Piotroski F-Score of 4 implies operations are stable. The company also has a business predictability ranking of one out of five stars. According to GuruFocus, companies with this rank typically see an average gain of 1.1% per year. The ranking is also on watch as SJM has posted a decline in revenue per share over the last several years.

The fund holds 0.21% of the company’s outstanding shares.

Ping An Healthcare and Technology

The fund established a 1.7 million-share stake in Ping An Healthcare for an average price of HK$51.75 per share, dedicating 1.05% of the equity portfolio to the position.

The online health care platform, which went public in May, has a HK$49.26 billion market cap; its shares closed at HK$46.15 on Monday with a price-book ratio of 10.31 and a price-sales ratio of 22.25.

The stock has fallen since its initial public offering.

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Supported by a strong Altman Z-Score of 14 and no debt, Ping An Healthcare’s financial strength was rated 7 out of 10 by GuruFocus. Its Beneish M-Score of -0.53, however, indicates the company may manipulate its financial statements. The company’s profitability and growth was rated 4 out of 10 as its margins and returns are negative. The Piotroski F-Score of 5, however, suggests operations are stable.

With 0.59% of outstanding shares, the Vanguard Health Care Fund (Trades, Portfolio) is the company’s largest guru shareholder.

China Jushi

The portfolio managers picked up 6.7 million shares of China Jushi for an average price of 11.99 yuan ($1.76) per share, allocating 1% of the equity portfolio to the stake.

The fiberglass manufacturer has a market cap of 34.22 billion yuan; its shares closed at 9.77 yuan on Monday with a price-earnings ratio of 14.8, a price-book ratio of 2.63 and a price-sales ratio of 3.69.

According to the Peter Lynch chart below, the stock is trading close to its fair value.

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GuruFocus rated China Jushi’s financial strength 4 out of 10 as its Altman Z-Score of 2.7 indicates it has minor financial stress. Supported by an expanding operating margin and a high Piotroski F-Score of 7, the company’s profitability and growth scored an 8 out of 10 rating. In addition, it has a 3.5-star business predictability ranking. GuruFocus says companies with this rank see, on average, a gain of 9.3% per year and have consistent earnings and revenue growth.

The fund holds 0.19% of the company’s outstanding shares.

YY

The China Fund started a 84,900-share holding of YY for an average price of $104.13 per share, expanding the equity portfolio by 0.83%.

The Chinese social media and internet streaming company has a market cap of $5.68 billion; its shares were trading around $89.70 on Tuesday with a price-earnings ratio of 15.44, a price-book ratio of 3.14 and a price-sales ratio of 2.91.

Based on the Peter Lynch chart below, the stock appears to be trading near its fair value.

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Boosted by a comfortable level of interest coverage and a strong Altman Z-Score of 5.46, YY’s financial strength was rated 9 out of 10 by GuruFocus. The company’s profitability and growth was rated 8 out of 10 as it has an expanding operating margin and a moderate Piotroski F-Score of 6.

Of the gurus invest in YY, Sarah Ketterer (Trades, Portfolio) has the largest holding with 0.99% of outstanding shares. Pioneer Investments (Trades, Portfolio), Lee Ainslie (Trades, Portfolio), Jim Simons (Trades, Portfolio)’ Renaissance Technologies, Ken Fisher (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio) and Caxton Associates (Trades, Portfolio) are also shareholders.

Beijing New Building Materials

Matthews purchased 2.8 million shares of Beijing New Building Materials for an average price of 22.76 yuan per share. The trade had an impact of 0.78% on the equity portfolio.

The company, which produces building materials, has a market cap of 31.8 billion yuan; its shares closed at 18.82 yuan on Tuesday with a price-earnings ratio of 12.55, a price-book ratio of 2.46 and a price-sales ratio of 2.84.

The Peter Lynch chart below suggests the stock is undervalued since it is trading below its fair value.

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Boosted by a high Altman Z-Score of 7.8, GuruFocus rated Beijing New Building Materials’ financial strength 7 out of 10. The company’s profitability and growth was rated 6 out of 10 as a result of an expanding operating margin, a strong Piotroski F-Score of 8 and a one-star business predictability ranking.

The fund holds 0.17% of the company’s outstanding shares.

Guangzhou Baiyun

The fund bought 3.9 million shares of Guangzhou Baiyun for an average price of 15.95 yuan per share, impacting the equity portfolio by 0.76%.

The aviation services provider has a 27.09 billion yuan market cap; its shares closed at 13.09 yuan on Monday with a price-earnings ratio of 15.4, a price-book ratio of 1.75 and a price-sales ratio of 3.46.

According to the Peter Lynch chart below, the stock is trading close to its fair value.

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GuruFocus rated Guangzhou Baiyun’s financial strength 6 out of 10. While the company has a strong debt-to-equity ratio, the Altman Z-Score of 2.9 indicates it is experiencing some financial pressure. The company’s profitability and growth scored an 8 out of 10 rating, bolstered by an expanding operating margin, a moderate Piotrsoki F-Score of 6 and a 3.5-star business predictability ranking. The ranking is on watch, however, as the company has posted declining revenue per share growth over the past 12 months.

The fund holds 0.19% of the company’s outstanding shares.

Other trades

The fund’s remaining two buys were automobile manufacturer Brilliance China Automotive Holdings Ltd. (HKSE:01114) and China Longyuan Power Group Corp Ltd. (HKSE:00916), which sells wind-generated energy. Matthews closed its previous positions in these stocks in the second quarters of 2017 and 2015.

The fund’s 50-stock portfolio, which is valued at around $1 billion, is largely invested in the financial services sector, followed by the technology and consumer cyclical sectors. According to its website, the fund posted a return of 59.37% for 2017, outperforming its benchmark, the MSCI China Index, which posted a 54.33% return.

Disclosure: No positions.