Matthews China Fund’s 3rd-Quar – GuruFocus.com

For the quarter ending September 30, 2021, the
Matthews China Fund (Trades, Portfolio) returned -13.08% (Trader Course) and -13.03% (Institutional Class), although its primary benchmark, the MSCI China Index, returned -18.13% about the identical period.

Marketplace Environment:

Chinese equities expert a significant promote-off next modern regulatory bulletins created on technological know-how and for-proft education and were being the weakest executing in the region in the third quarter. In addition, modern economic information has pointed to a slowdown of economic expansion which has been compounded by concerns of a weaker genuine estate sector, as China Evergrande Team, one of the country s greatest serious estate developers, has operate into money anxiety. Fears of systemic fiscal sector contagion and the publicized electrical energy shortages following the govt pressed for limits of electrical power production to cut down carbon output contributed to ongoing headwinds. Authentic estate, buyer discretionary and interaction solutions sectors ended up weak all through the quarter, although cyclical sectors like power and elements were being among the ideal performers. Mega caps underperformed though mid- and tiny-cap equities ended up the most insulated from downside force.

Effectiveness Contributors and Detractors:

The Fund’s outperformance in the course of the 3rd quarter was driven by the two strong stock variety and sector allocation outcomes. From a sector perspective, inventory assortment in fnancials, customer discretionary and facts technological innovation contributed to relative performance. Amid the Fund’s customer discretionary holdings, Zhongsheng Team Holdings (HKSE:00881, Financial), a luxury automobile dealership, contributed to relative general performance, provided appealing valuations and the ongoing development experienced in China’s luxury car sector. In the financials sector, our holdings in brokerages, like CITIC Securities Co. (SHSE:600030, Money) and China Merchants Securities Co. (SHSE:600999, Financial), did well. The Fund’s signifcant allocation to brokerages stems from cheap valuations and still sturdy fundamentals and earnings development offered their skill to grow service offerings as China’s cash marketplaces deepen. The information and facts know-how sector ongoing to add positively to general performance year to date, buoyed by Wuxi Guide Smart Gear Co. (SZSE:300450, Money) and Naura Technology Team Co. (SZSE:002371, Financial)- digital equipment companies in the semiconductor and electric powered motor vehicle place which continued to beneft from ongoing funds expenses in just these industries as they execute their capacity enlargement designs.

On the other hand, the true estate, vitality and utilities sectors detracted from relative functionality. The portfolio’s authentic estate holdings KWG Living Team Holdings (HKSE:03913, Fiscal), a home management products and services provider, and KE Holdings (BEKE, Economical), a housing transactions platform company, continued to encounter weakness on an at any time tightening coverage environment deepening sector problems about the outlook of the all round property sector in China in the third quarter. Nevertheless, given the sharp pull back in valuations, we proceed to think serious estate options in China are attractively valued and could offer superior dividend yields, generating the danger reward potential clients even a lot more favorable. In the two the power and utility sectors, the Fund underperformed provided a deficiency of sector exposure in these parts of the current market which have rallied on the again of greater power prices and initiatives to develop renewable energy contributions inside of the earnings combine of conventional utility companies. e are even now evaluating the alternatives, but feel that immediate opportunities in renewable energy progress can be captured somewhere else in the portfolio, e.g., in industrials and products.

Noteworthy Portfolio Alterations:

During the 3rd quarter, China equities ongoing to be unstable as authentic estate considerations weighed on an currently fragile industry sentiment. We continued to choose the opportunity to reallocate funds into expansion areas that have skilled a substantial pull back in valuations. We have lessened the Fund’s financials exposure somewhat and included positions to sectors this kind of as information engineering, supplies and purchaser discretionary, specified nevertheless robust secular advancement prospects. A person addition throughout the 3rd quarter was Shanghai Baosight (SHSE:600845, Money), an IT solutions service provider that caters mostly to the IT wants of the metal sector. Its father or mother and premier consumer is China’s primary steel organization, Baoshan Iron and Metal (SHSE:600019, Economical), which has been major the market in digitizing its functions. We see an appealing growth prospective for the enterprise, as the steel market continues to digitize production processes in its effort to optimize efficiency and optimize operations to facilitate growth in a additional emissions- managed world. We closed out our small place in Luxshare Precision Business (SZSE:002475, Economic), an electronics producing providers (“EMS”) seller that provides foremost smartphone organizations all over the earth. We exited Luxshare due to our more cautious see of a moderate outlook on smartphone development. Getting an all-shares tactic to investing in Chinese equities, we have continued to add to the all round A-share publicity of the portfolio, with the over-all A-share exposure expanding from close to 30% to 3 % over the earlier six months.

Outlook:

To start with 50 % earnings benefits declared in the third quarter in China confirmed continued COVID recovery and had been usually encouraging throughout the board, other than for a weaker recovery in some elements of use, e.g., shopper staples, which we continue to keep an eye on carefully. The 1st 50 percent effects also shed some light-weight on opportunity authorities directives over the upcoming year, which we think will be positively directed towards China’s efforts at amplified domestic self-sufficiency across a myriad of source chains (e.g., engineering and wellbeing treatment) and environmental efforts to more advertise environmentally friendly energy developments in China. We think there are a lot of chances in China that stand to beneft positively from these developments and count on to see significant volume expansions, which must help drive constructive earnings expansion throughout these supported industries.

As of September 30, 2021, the securities pointed out comprised the
Matthews China Fund (Trades, Portfolio) in the pursuing percentages Zhongsheng Group Holdings, Ltd., 1.7% CITIC Securities Co., 3.2% China Retailers Securities Co., 2.2% Wuxi Guide Clever Products Co., 1.8% Naura Technological innovation Team Co., .6% KWG Dwelling Group Holdings Ltd., .4% KE Holdings, Inc., .9% Shanghai Baosight Program Co., 1.5%. he Fund held no positions in China Evergrande Team, Baoshan Iron and Metal and Luxshare Precision Market.

Present-day and potential portfolio holdings are subject matter to change and possibility.

Earnings progress is not agent of the Fund s long term overall performance.

All functionality quoted is previous effectiveness and is no assurance of future benefits. Financial commitment return and principal
price will fuctuate with shifting market ailments so that shares, when redeemed, may possibly be well worth much more or considerably less than
their first charge. Present functionality may perhaps be decreased or higher than the return fgures quoted. Returns would have
been decrease if particular of the Fund’s expenses and charges experienced not been waived. Remember to see the Fund’s most recent
month-stop general performance.

The information and facts contained herein has been derived from resources believed to be trustworthy and precise at the time of
compilation, but no representation or guarantee (categorical or implied) is made as to the accuracy or completeness of
any of this information and facts. Neither the money nor the Financial investment Advisor acknowledge any legal responsibility for losses either direct or
consequential brought on by the use of this data.

The sights and thoughts in the commentary have been as of the report date, subject matter to adjust and might not refect latest
sights. They are not assures of efficiency or expenditure effects and must not be taken as investment decision suggestions.
Investment decision decisions refect a selection of components, and the administrators reserve the ideal to alter their sights about
personal stocks, sectors, and the markets at any time. As a end result, the sights expressed ought to not be relied upon as
a forecast of the Fund’s long term financial commitment intent. It should not be assumed that any financial commitment will be proftable or
will equal the efficiency of any securities or any sectors described herein. The data does not represent a
recommendation to obtain or provide any securities mentioned.