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

For the quarter ending September 30, 2021, the
Matthews China Fund (Trades, Portfolio) returned -13.08% (Investor Course) and -13.03% (Institutional Class), while its major benchmark, the MSCI China Index, returned -18.13% above the identical time period.

Market Surroundings:

Chinese equities experienced a big offer-off following latest regulatory announcements made on technology and for-proft education and learning and were being the weakest doing in the location in the third quarter. In addition, recent financial knowledge has pointed to a slowdown of economic progress which has been compounded by concerns of a weaker genuine estate sector, as China Evergrande Team, one of the country s major genuine estate developers, has operate into monetary strain. Fears of systemic economical marketplace contagion and the publicized electrical energy shortages immediately after the govt pressed for limitations of power creation to lessen carbon output contributed to ongoing headwinds. Serious estate, client discretionary and conversation providers sectors have been weak for the duration of the quarter, whilst cyclical sectors like vitality and resources have been amid the finest performers. Mega caps underperformed while mid- and modest-cap equities have been the most insulated from downside pressure.

Performance Contributors and Detractors:

The Fund’s outperformance through the third quarter was pushed by equally powerful inventory selection and sector allocation outcomes. From a sector viewpoint, stock range in fnancials, client discretionary and details technological innovation contributed to relative effectiveness. Between the Fund’s shopper discretionary holdings, Zhongsheng Team Holdings (HKSE:00881, Fiscal), a luxury car dealership, contributed to relative effectiveness, presented interesting valuations and the continued growth expert in China’s luxury automobile sector. In the financials sector, our holdings in brokerages, like CITIC Securities Co. (SHSE:600030, Economical) and China Merchants Securities Co. (SHSE:600999, Financial), did properly. The Fund’s signifcant allocation to brokerages stems from low-priced valuations and however robust fundamentals and earnings advancement supplied their capability to broaden service offerings as China’s capital marketplaces deepen. The details know-how sector continued to add positively to general performance 12 months to day, buoyed by Wuxi Guide Smart Machines Co. (SZSE:300450, Monetary) and Naura Technological innovation Team Co. (SZSE:002371, Financial)- digital equipment businesses in the semiconductor and electric powered car or truck house which continued to beneft from ongoing cash expenses within these industries as they execute their potential enlargement strategies.

On the other hand, the real estate, power and utilities sectors detracted from relative effectiveness. The portfolio’s genuine estate holdings KWG Residing Team Holdings (HKSE:03913, Monetary), a home administration products and services supplier, and KE Holdings (BEKE, Fiscal), a housing transactions system provider, ongoing to encounter weakness on an at any time tightening coverage setting deepening industry considerations about the outlook of the in general assets marketplace in China in the third quarter. Nonetheless, offered the sharp pull again in valuations, we carry on to think authentic estate prospects in China are attractively valued and could offer you higher dividend yields, making the chance reward prospective customers even much more favorable. In both of those the strength and utility sectors, the Fund underperformed offered a deficiency of sector exposure in these areas of the current market which have rallied on the back again of higher electricity rates and attempts to expand renewable electrical power contributions inside the earnings mix of traditional utility firms. e are however evaluating the prospects, but feel that direct prospects in renewable strength expansion can be captured in other places in the portfolio, e.g., in industrials and supplies.

Notable Portfolio Alterations:

Through the third quarter, China equities ongoing to be unstable as authentic estate concerns weighed on an previously fragile market sentiment. We ongoing to consider the prospect to reallocate capital into advancement areas that have expert a substantial pull again in valuations. We have decreased the Fund’s financials exposure a little and added positions to sectors this kind of as data engineering, materials and buyer discretionary, offered even now potent secular growth prospects. A single addition throughout the 3rd quarter was Shanghai Baosight (SHSE:600845, Money), an IT alternatives supplier that caters largely to the IT demands of the steel field. Its mum or dad and greatest consumer is China’s primary metal company, Baoshan Iron and Metal (SHSE:600019, Economic), which has been leading the marketplace in digitizing its operations. We see an attractive growth opportunity for the business, as the steel industry continues to digitize producing processes in its effort and hard work to increase performance and improve functions to facilitate advancement within just a far more emissions- managed earth. We shut out our smaller placement in Luxshare Precision Sector (SZSE:002475, Money), an electronics production expert services (“EMS”) seller that provides top smartphone businesses all-around the world. We exited Luxshare owing to our more cautious view of a moderate outlook on smartphone progress. Taking an all-shares solution to investing in Chinese equities, we have ongoing to increase to the total A-share exposure of the portfolio, with the general A-share exposure rising from all around 30% to 3 % around the earlier six months.

Outlook:

1st fifty percent earnings success announced in the third quarter in China showed continued COVID recovery and have been frequently encouraging throughout the board, other than for a weaker recovery in some elements of intake, e.g., purchaser staples, which we continue to keep an eye on carefully. The 1st 50 % results also drop some gentle on opportunity authorities directives over the up coming yr, which we think will be positively directed towards China’s endeavours at increased domestic self-sufficiency throughout a myriad of source chains (e.g., know-how and wellbeing care) and environmental initiatives to even further promote environmentally friendly energy developments in China. We imagine there are several alternatives in China that stand to beneft positively from these developments and expect to see meaningful quantity expansions, which need to assistance drive optimistic earnings progress throughout these supported industries.

As of September 30, 2021, the securities talked about comprised the
Matthews China Fund (Trades, Portfolio) in the following percentages Zhongsheng Group Holdings, Ltd., 1.7% CITIC Securities Co., 3.2% China Retailers Securities Co., 2.2% Wuxi Guide Smart Devices Co., 1.8% Naura Technologies Group Co., .6% KWG Dwelling Group Holdings Ltd., .4% KE Holdings, Inc., .9% Shanghai Baosight Computer software Co., 1.5%. he Fund held no positions in China Evergrande Team, Baoshan Iron and Steel and Luxshare Precision Market.

Present-day and long term portfolio holdings are matter to improve and risk.

Earnings advancement is not agent of the Fund s potential general performance.

All overall performance quoted is earlier general performance and is no ensure of potential results. Financial investment return and principal
worth will fuctuate with modifying market disorders so that shares, when redeemed, may well be truly worth a lot more or significantly less than
their unique price. Present effectiveness could be decreased or increased than the return fgures quoted. Returns would have
been reduce if certain of the Fund’s fees and expenses experienced not been waived. Please see the Fund’s most modern
month-close general performance.

The facts contained herein has been derived from resources considered to be reputable and precise at the time of
compilation, but no representation or warranty (express or implied) is created as to the accuracy or completeness of
any of this information. Neither the money nor the Expenditure Advisor settle for any legal responsibility for losses both direct or
consequential triggered by the use of this data.

The sights and views in the commentary had been as of the report date, matter to alter and may possibly not refect present-day
sights. They are not guarantees of performance or expense outcomes and ought to not be taken as expenditure tips.
Investment decisions refect a variety of factors, and the professionals reserve the right to adjust their sights about
specific shares, sectors, and the markets at any time. As a result, the views expressed should not be relied on as
a forecast of the Fund’s long term investment decision intent. It should not be assumed that any expenditure will be proftable or
will equivalent the effectiveness of any securities or any sectors outlined herein. The data does not constitute a
suggestion to acquire or offer any securities described.