The Matthews China Fund (Trades, Portfolio) invests at least 80% of its assets in China, which includes the administrative and other districts, such as Hong Kong. As of Dec. 31, the fund had $1 billion in assets under management.
The fund’s lead portfolio manager is Richard Gao, who also co-manages the Pacific Tiger fund. Gao began his career at the Bank of China as a loan officer, then became the assistant manager in charge of FOREX trading for import/export companies.
The chart below shows the fund’s returns relative to its index, the MSCI China Index.
During the fourth quarter, the fund each sold and divested two holdings.
New buys
Kweichow Moutai Co (SHSE:600519, Financial)
Matthews purchased 599,028 shares of Kweichow Moutai at an average price of ¥163.71 per share. The stock now accounts for 1.9% of the portfolio.
Kweichow Moutai Group has 32 wholly-owned subsidiaries involved in liquor, beer, wine, securities, banking, tourism, and others.
The stock has been up 47% over the past year, and is undervalued according to the Peter Lynch chart as of September 2014.
GuruFocus rates Kweichow’s business predictability as a perfect 5-stars. The operating margin has increased 3.72% over the past five years, and is much higher than the alcoholic beverage industry average.
Kweichow also has a strong balance sheet with a current ratio of 3.7, and no long-term debt.
The stock currently trades at ¥178.37, and the DCF model projects a fair value of ¥411.65, giving a 57% margin of safety. Since the company is estimated to be undervalued according to both the Peter Lynch chart and DCF model, Matthews chose an opportune time to initiate the position.
Jiangsu Hengrui Medicine (SHSE:600276, Financial)
The fund’s second purchase was 2,811,630 shares in Jiangsu Hengrui at an average price of ¥37.82 per share.
Jiangsu Hengrui produces cancer treatment drugs, surgical medicines, endocrine therapy drugs, cardiovascular drugs, and anti-infection medications.
The current ratio is 8.78, meaning the company can very comfortably pay its short-term obligations. Long-term debt amounted to ¥10 million in FY 2013, and has remained steady over time.
The current P/E ratio is 39.6, which has been steady since FY 2011.
GuruFocus rates Jiangsu Hengrui’s business predictability as 4 out of 5 stars. The DCF model projects a -39% margin of safety, suggesting the company could be overvalued.
Sold out
China Life Insurance (HKSE:02628, Financial)
Matthews sold out of 5,084,000 shares of China Life Insurance for an average price of HK$22.25 per share.
The company was formed in 2003 and provides individual life, group life, accident, and health insurance.
The stock has been up 54% over the past year, and may be overvalued when comparing the price to the Peter Lynch earnings line.
The current dividend yield 1.21%, and the payout ratio is 27%. However, the five-year growth rate of the dividend is about -20%.
Another cause for concern is the company’s operating margin has been in long-term decline, decreasing by about 25% over the past five years.
Digital China Holdings (HKSE:00861, Financial)
The fund also sold 2,843,000 shares of Digital China Holdings for an average price of HK$7.46 per share.
Digital China is a distributor of IT products, and also provides system integration and IT services. In the Matthews China Fund (Trades, Portfolio) Q2 2014 shareholder letter, the fund noted the company was losing revenue in the IT product distribution segment due to a struggling economy and changing operating environment.
The company’s long-term debt has been increasing over time by almost 38% over the past five years.
Digital China’s dividend yield is 2.46%, while the payout ratio is 33%. However, the company has decreased its annual dividend each year since 2012.
As of the third quarter, Charles de Vaulx (Trades, Portfolio) also held a 2.71% stake in Digital China.
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