For the first half of 2023, the Matthews Asia Dividend Fund returned 2.93% (Investor Class) and 2.97% (Institutional Class), while its benchmark, the MSCI All Country Asia Pacific Index, returned 6.35% over the same period. For the quarter ending June 30, 2023, the Fund returned 0.07% (Investor Class) and 0.07% (Institutional Class), while the benchmark returned 1.43%.

Market Environment:

2023 began with a continuation of the rally in Asian markets but a rally that quickly petered out. The remainder of the first half of the year saw a diverging performance across countries in the Asia Pacific region. Hopes for a rapid recovery in China post reopening were disappointed with relatively weak economic data and underwhelming stimulus measures. U.S.-China political tensions and the implementation of semiconductor trade sanctions by the U.S. also weighed on sentiment. This helped drive China/Hong Kong to be the third-weakest performing market during the period ahead of only Thailand and Malaysia. Conversely, technology-focused stocks boosted the markets of South Korea and Taiwan, driven by expectations of inventories clearing through the rest of the year as well as the long-term potential presented by artificial intelligence. Stocks in Japan rallied on continued corporate reform with capital return policies improving.

Performance Contributors and Detractors:

From a country perspective, the portfolio’s mild overweight and stock selection in China and Hong Kong was the biggest detractor to relative performance in the first half as slowing industrial output and disappointing retail sales, alongside disappointing stimulus and a prolonged property downturn, weighed on stocks. Stock selection was impacted particularly by weakness in select domestically focused businesses. In Japan, stock selection was also a large detractor as certain holdings in areas such as real estate fell. Turning to India, stock selection in what we deem to be a fairly expensive market hurt relative performance. On the flip side, stock selection in in Australia and Indonesia benefited performance, with gains in the commercial banking sector helping the latter.

From a sector perspective, stock selections within consumer discretionary, health care and industrials were big detractors from relative performance while selections in financials and IT were strong contributors.

At the individual holdings level, a number of the Fund’s largest detractors came from China. JD.com, a leading ecommerce player, China Tourism Group, a leading duty-free licensed operator, and Wuliangye Yibin, a prominent baijiu company, all slumped given an underwhelming consumer recovery post reopening. There are also concerns over increasing competition for JD.com and China Tourism in their respective sectors. Milkyway Chemical Supply Chain Service, a logistics and distribution company, fell on soft earnings as end markets were likely weaker than had been hoped. In contrast, some of the largest contributors to returns came from Japan, with semiconductor equipment manufacturer Disco benefiting from the strength in the broader IT sector and as certain end markets look to bottom out as well, with growth in areas such as power semiconductors. Trading company Itochu gained on robust earnings and an improving shareholder return policy.

Notable Portfolio Changes:

The portfolio had several changes during the quarter with alterations in both Japanese and Chinese holdings. We exited our holding in the health care sector in China where life science-service company Pharmaron Beijing has faced earnings challenges. In Japan, we sold real estate-services provider Katitas as a changing mix in its business model and a tax dispute are expected to weigh on margins in the medium term. We also exited precision machinery parts-distributor Misumi Group amid heightened competition in overseas markets.

These exits funded new positions including in Japanese telecom provider KDDI. The stock offers meaningful share buybacks, a healthy dividend yield of over 3% and a multi-decade track record of dividend increases. We believe that it may also benefit from reduced competition. We also initiated a position in Guangdong Investment, a utility company that is a leading provider of water to Hong Kong, given its relatively stable cash generating ability and 9% dividend yield. Elsewhere in Japan, Suzuki Motor was added to the portfolio. The company derives significant value from its stake in India’s leading auto producer, Maruti Suzuki India, that has a reasonable new-model cycle as well as solid growth prospects in the medium term on rising volumes. We believe the stock is attractively valued at around 5x EV/EBITDA and offering over a 2% dividend yield.

Outlook:

Fears of a global recession, geopolitics, and a spotty recovery in China continue to weigh on earnings growth expectations and sentiment for some of the Asian region. With a quick recovery delayed, markets await clarity from the government in China on how it can increase consumer confidence and stimulate private investment. However, this uncertainty may be being priced in as the MSCI China Index trades at a fairly low multiple of 9x forward P/E. Further, it should be remembered that a lack of inflationary pressure in China allows room for some policy easing. Elsewhere in the region, countries like India and Indonesia, continue to see consumer demand while the former can benefit from the relocation of supply chains. If China has been one of the more challenged markets in Asia then it is Japan that remains one of the brighter spots, supported by what may be a return in inflation and improving shareholder return policies that have attracted broader interest in equities.

At a micro level, valuations remain reasonable at around 13x 2023 earnings expectations for the Asia Pacific market, with growth anticipated to be somewhat muted this year before rebounding to double digit growth in 2024. We continue to prefer investing in companies that allow the portfolio to balance dividend yields with dividend growth, aiming to deliver solid total returns through the economic cycle. This is a strategy that we hope is reasonably placed against what remains an uncertain macroeconomic backdrop.

Dividend yield: A financial ratio that shows how much a company pays out in dividends each year relative to its share price.

Earnings growth: The change in a company’s reported net income over a period of time, such as from quarter to quarter or from year to year.

MSCI China Index: An index capturing large and mid cap representation across China A shares, H shares, B shares, Red chips, P chips and foreign listings, like ADRs. Currently the index includes Large Cap A and Mid Cap A shares represented at 20% of their free float-adjusted market capitalization.

Price-to-earnings (P/E) ratio: A valuation ratio of a company's current share price compared to its per-share earnings.

Top 10 holdings as of June 30, 2023. Current and future holdings are subject to change and risk. Dividends are not guaranteed and may fluctuate.

Average Annual Total Returns - MAPIX as of 06/30/2023