The Matthews Asia Small Companies Fund (Trades, Portfolio), part of San Francisco-based investment firm Matthews International Capital Management, disclosed 14 new positions in its second-quarter portfolio, which was released late last week.
Managed by Tiffany Hsiao and Beini Zhou, the fund invests in smaller companies across Asia, with the exception of Japan, that are capable of sustainable growth based on several fundamental characteristics. Its primary goal is long-term capital appreciation.
The fund’s five largest trades for the quarter were completely made up of new holdings, which were Peijia Medical Ltd. (HKSE:09996), Sichuan Teway Food Group Co. Ltd. (SHSE:603317), Dr. Lal PathLabs Ltd. (NSE:LALPATHLAB), Legend Biotech Corp. (NASDAQ:LEGN) and Voltronic Power Technology Corp. (TPE:6409).
The Asia Small Companies Fund invested in 989,000 shares of Peijia Medical, allocating 2.76% of the equity portfolio to the position. The stock traded for an average price of 29.15 Hong Kong dollars ($3.76) per share during the quarter.
The Chinese company, which manufactures medical devices for heart and neurovascular diseases, has a HK$19.21 billion market cap; its shares were trading around HK$30.5 on Wednesday with a price-sales ratio of 892.6.
Since its initial public offering in May, GuruFocus estimates the stock has gained nearly 20%.
GuruFocus rated Peijia’s financial strength 4 out of 10 as its Sloan ratio indicates it has poor earnings quality. The cash-debt ratio of 219.99, however, is outperforming versus its industry and its history.
The company is also being weighed down by negative margins and returns that underperform a majority of competitors.
The fund holds 0.16% of Peijia’s outstanding shares.
Sichuan Teway Food Group
The fund picked up 460,310 shares of Sichuan Teway Food Group, dedicating 2.24% of the equity portfolio to the holding. During the quarter, shares traded for an average price of 42.38 yuan ($6.11) each.
The China-based food company, which manufactures seasoning and condiments, has a market cap of 35.08 billion yuan; its shares were trading around 59.53 yuan on Wednesday with a price-earnings ratio of 117.2, a price-book ratio of 18.24 and a price-sales ratio of 20.01.
The Peter Lynch chart shows the stock is trading above its fair value, suggesting it is overpriced.
Driven by no long-term debt and a robust Altman Z-Score of 55.35, Sichaun’s financial strength was rated 8 out of 10 by GuruFocus.
The company’s profitability scored a 7 out of 10 rating on the back of an expanding operating margin and strong returns that outperform a majority of industry peers. Sichuan has recorded a slowdown in revenue per share growth over the past 12 months, however.
Matthews Asia holds 0.08% of the company’s outstanding shares.
Dr. Lal PathLabs
The fund entered a 146,798-share position in Dr. Lal Pathlabs, giving it 1.88% space in the equity portfolio. The stock traded for an average per share price of 1,534.99 rupees ($20.52) during the quarter.
The Indian company, which provides blood diagnostic and related health care testing services, has a market cap of 153.37 billion rupees; its shares closed at 1,840.2 rupees on Tuesday with a price-earnings ratio of 67.24, a price-book ratio of 14.7 and a price-sales ratio of 11.42.
According to the Peter Lynch chart, the stock is overvalued.
Dr. Lal Pathlabs’ financial strength and profitability were both rated 8 out of 10 by GuruFocus. In addition to adequate interest coverage, the company is supported by a high Altman Z-Score of 32.67 that implies it is in good standing even though assets are building up at a faster rate than revenue is growing. The return on invested capital also significantly surpasses the weighted average cost of capital, indicating the company has good profitability.
The medical diagnostics company is also benefitting from expanding operating margins and strong returns that outperform a majority of competitors. The Piotroski F-Score of 2, however, indicates poor business conditions.
The Asia Small Companies Fund holds 0.18% of Dr. Lal Pathlabs’ outstanding shares.
Matthews Asia purchased a 68,659-share holding in Legend Biotech. The trade had an impact of 1.80% on the equity portfolio. During the quarter, the stock traded for an average price of $39.07 per share.
The biopharmaceutical company focused on developing cell-based therapies, which is headquartered in New Jersey, has a $4.39 billion market cap; its shares were trading around $34.07 on Wednesday with a price-sales ratio of 76.75.
GuruFocus estimates the stock has declined around 8% since its IPO in June.
GuruFocus rated Legend Biotech’s financial strength 5 out of 10 on the back of a high cash-debt ratio of 26.12 that outperforms more than half of its industry peers.
The company’s margins and returns are negative and underperform over half of the companies in the industry.
The fund holds 0.05% of Legend Biotech’s outstanding shares.
Voltronic Power Technology
Having previously closed out of a holding in Voltronic Power Technology in the fourth quarter of 2016, the fund opened a new 100,000-share position, expanding the equity portfolio by 1.78%. Shares traded for an average price of 748.17 New Taiwan dollars ($25.49) each during the quarter.
The Taiwanese company, which manufactures uninterruptible power systems, photovoltaic products and electronic materials, has a NT$75.64 billion market cap; its shares closed at NT$908 on Tuesday with a price-earnings ratio of 34.93, a price-book ratio of 14.2 and a price-sales ratio of 5.96.
Based on the Peter Lynch chart, the stock appears to be overvalued.
Voltronic’s financial strength and profitability were both rated 8 out of 10 by GuruFocus. In addition to comfortable interest coverage, the company is supported by a high Altman Z-Score of 11.53 that indicates it is in good standing even though assets are building up at a faster rate than revenue is growing. The ROIC also significantly outperforms the WACC, indicating good profitability.
The company is also being supported by an expanding operating margin, strong returns that outperform a majority of competitors and a moderate Piotroski F-Score of 6, which suggests business conditions are stable.
The Wasatch International Growth (Trades, Portfolio) Fund is Voltronic’s largest guru shareholder with 0.82% of its outstanding shares.
Additional trades and portfolio performance
Other companies Matthews invested in during the quarter were Hugel Inc. (XKRX:145020), Yantai China Pet Foods Co. Ltd. (SZSE:002891), Hongfa Technology Co. Ltd. (SHSE:600885), Realtek Semiconductor Corp. (TPE:2379), Jiumaojiu International Holdings Ltd. (HKSE:09922), Kinx Inc. (XKRX:093320), Koolearn Technology Holding Ltd. (HKSE:01797), Kangji Medical Holdings Ltd. (HKSE:09997) and Hygeia Healthcare Holdings Co. Ltd. (HKSE:06078). It also divested of nearly 30 positions and added to or trimmed a slew of other holdings.
Nearly 60% of the Asia Small Companies Fund’s $162 million equity portfolio, which is composed of 63 stocks, is invested in the technology and health care sectors.
According to its fact sheet, the fund returned 17.38% in 2019, outperforming the MSCI All Country Asia ex. Japan Small Cap Index’s 7.58% return.
Disclosure: No positions.
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This article first appeared on GuruFocus.