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Matthews China Fund's Top 5 Buys of the 2nd Quarter

The Matthews China Fund (Trades, Portfolio) disclosed this week its top five buys for the second quarter included one new holding: Lepu Medical Technology Co. Ltd. (SZSE:300003).

The fund, overseen by lead manager Andrew Mattock and co-manager Winnie Chwang, seeks long-term capital appreciation through investments primarily in China and Hong Kong. According to the quarterly letter, the China Fund returned -1.46% for the quarter and 22.27% for the first half of the year, outperforming the MSCI China Index's return of -3.92% for the quarter and 13.08% for the first half.

Fund updates market environment as U.S. - China trade war lingers on

The Dow Jones Industrial Average, a U.S. index that tracks 30 blue-chip stocks, turned negative on Thursday on the heels of President Trump announcing in a series of tweets that while trade talks are continuing, the U.S. will enact a 10% tariff on $300 billion worth of goods coming from China. Although the Dow reached an intraday high of 27,175.59 during the morning, the 30-stock index closed at 26,583.42, down 280.85 points from Wednesday's close of 26,864.27 and 614.6 points from Tuesday's close of 27,198.02. Apple Inc. (NASDAQ:AAPL), the top holding of Warren Buffett (Trades, Portfolio)'s Berkshire Hathaway Inc. (NYSE:BRK.A)(NYSE:BRK.B), tumbled 2.16% for the day.

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The fund's second-quarter letter said despite the market volatility, Chinese equities posted "strong results" during the first six months as the government's "easing posture" helps mitigate long-term market risks. The letter added that market participants seemed "reassured" by the incremental policy shift in policy support for economic growth.

As of quarter-end, the fund's $819 million equity portfolio contains 46 stocks, including one new holding. The fund's top sectors in terms of weight are financial services, consumer discretionary and technology.

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For the quarter, the fund's top five buys included a new holding in Lepu and position boosts in the following companies: Tencent Holdings Ltd. (HKSE:00700), China Overseas Property Holdings Ltd. (HKSE:02669), CITIC Securities Co. Ltd. (HKSE:06030) and China Resources Land Ltd. (HKSE:01109).

Lepu

The fund purchased 2,634,606 shares of Lepu, giving the stake 1.08% weight in the equity portfolio. Shares averaged 24.61 yuan ($3.57) during the quarter.

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The fund's letter said Lepu, a medical device company, has added cardiovascular drugs to its core business. Additionally, the Beijing-based company marketed a new product line of biodegradable stents that are designed to dissolve after use.

GuruFocus ranks Lepu's profitability 10 out of 10 on several positive indicators, which include a strong Piotroski F-score of 8, a four-star business predictability rank and operating margins that have increased approximately 2% per average over the past five years and are outperforming over 93% of global competitors.

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Tencent

The fund purchased 298,100 shares of Tencent, increasing the position 19.57% and the equity portfolio 1.65%. Shares averaged 360.2 Hong Kong dollars ($46.01) during the quarter.

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The Shenzhen, Guangdong-based company operates several social media platforms like WeChat and QQ. GuruFocus ranks Tencent's profitability 8 out of 10 on several positive indicators, which include a five-star business predictability rank and operating margins outperforming 80.26% of global competitors despite contracting 3.1% per year on average over the past five years.

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China Overseas Property

The fund added 19,665,000 shares of China Overseas Property, increasing the holding 1,605.31% and the equity portfolio 1.25%. Shares averaged HK$3.78 during the quarter.

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The Hong Kong-based company provides real estate services through two business segments: property management services and value-added services. GuruFocus ranks the company's financial strength 8 out of 10 on several positive signs, which include solid interest coverage and a strong Altman Z-score of 5.35.

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CITIC Securities

The fund added 4,056,500 shares of CITIC Securities, increasing the stake 112.23% and the equity portfolio 1.03%. Shares averaged HK$16.11 during the quarter.

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The Shenzhen, Guangdong-based company provides various services, including brokerage, underwriting, sponsoring and proprietary trading. GuruFocus ranks the company's financial strength 4 out of 10 on several poor indicators, including debt ratios that underperform over 63% of global competitors. The website warns the company's long-term debt has increased 37.5 billion yuan (approximately $5.44 billion) over the past three years.

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China Resources Land

The fund added 1.78 million shares of China Resources Land, increasing the position 44.63% and the equity portfolio 0.96%. Shares averaged HK$33.53 during the quarter.

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GuruFocus ranks the company's profitability 8 out of 10: Even though the Piotroski F-score ranks a modest 5 out of 9, China Resources Land's return on equity outperforms 80% of global competitors. Additionally, the company has a three-star predictability rank and operating margins that have increased approximately 10.20% per year on average over the past five years.

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Disclosure: No positions.

Read more here:

  • David Nadel's Top 5 Buys of the 2nd Quarter
  • Oaktree's Top 5 Industrial Companies
  • Warren Buffett's Apple Rises on Strong 2nd-Quarter Revenue Growth



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This article first appeared on GuruFocus.