transcript - matthews asia portfolio manager roundtable...

Matthews Asia Webcast

Portfolio Manager Roundtable

Participants

Jodi Morris, CFA, CFP®, Senior Vice President of Matthews International Capital Management

Robert Horrocks, PhD, Chief Investment Officer and Portfolio Manager, Matthews Asian Growth and Income Jesper Madsen, CFA, Portfolio Manager, Matthews Asia Dividend and China Dividend Strategies Taizo Ishida, Portfolio Manager, Matthews Asia Growth and Japan Strategies Sharat Shroff, CFA, Portfolio Manager, Matthews Asia Pacific Tiger and India Strategies

Presentation Jodi Morris, CFA, CFP®—Moderator

Good afternoon. Thank you all for participating in

today’s mid-year Matthews Portfolio Manager

Roundtable. In our quarterly webcasts we like to

alternate between educational discussions and mid-

and year-end portfolio manager roundtables where we

have the opportunity to hear from a collection of Matthews lead managers who share an update on the

regional strategies that they manage.

For 2012, during the first quarter, we

witnessed double-digit returns in many global

markets. But the second quarter has been

quite volatile, to say the least, and I think the

theme of the year has been that of global

economic uncertainty- whether it is the

strength of the U.S. economy, continued debt

issues in the Eurozone, or concerns over

China’s slowing growth. So the question is:

what does this uncertainty—both outside and

within Asia—mean for Matthews and the

Matthews investment team?

Simply stated, despite all this global

macroeconomic noise, we remain confident in

the long-term growth of Asia. So in our time

today what we would like to do is share

different perspectives on all of this overall

global economic uncertainty. Joining me

today are the lead managers of our core

Matthews regional strategies. And they are

four members of our 33 person-deep

Matthews investment team. The full team is

based here in San Francisco and also remains

as committed ever to their on the ground

research in the developed, emerging and

frontier markets of Asia.

The emphasis that the team places on this

long-term fundamental research underlies all

13 of our Matthews investment strategies. And

this includes our dedicated fixed income

June 7, 2012

MATTHEWS ASIA WEBCAST—PORTFOLIO MANAGER ROUNDTABLE | JUNE 7, 2012

©2012 Matthews International Capital Management, LLC

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strategy, the Matthews Asia Strategic Income

strategy, which we launched six months ago.

We are very excited about the evolution of

Asia’s fixed income market and the strategy is

quite unique in allocating both to sovereign

and corporate bonds, and giving investors

diversification in both local currency and U.S.

dollar exposure, investing in fixed income

instruments in Asia.

But our roundtable today is going to highlight

our equity strategies. So let me introduce our

roundtable and also remind you all of the

regional strategies which each manager leads.

First is Robert Horrocks who is Matthews’

Chief Investment Officer and the Lead

Manager of the Matthews Asian Growth and

Income strategy. We were pleased to

announce the reopening of the Matthews

Asian Growth and Income strategy in January.

Now the Asian Growth and Income strategy is

designed to be our least volatile of our core

equity strategies here at Matthews. And it

invests in equities with solid dividends,

convertible bonds and selectively some

straight fixed income as well. The strategy is

compared to the MSCI All Country Asia ex

Japan Index. But that said it may allocate to

some countries outside of the index. So, for

example, we have held 5% to 10% in Japanese

companies for some time.

Next up is Jesper Madsen who is the Lead

Manager of the Matthews Asia Dividend

strategy. Jesper has been a portfolio manager

on that strategy since its inception back in

2006. The Matthews Asia Dividend strategy’s

objective is total return. It focuses on dividend

paying equities, but most importantly, those

companies we believe that can grow those

dividend streams. So while lower volatility is

not part of the objective of the strategy as is

the case with the Matthews Asian Growth and

Income strategy, it may be a result of this

dividend focus. This strategy is compared with

the MSCI All Country Asia Pacific Index and

that would obviously include developed

markets like Japan and Australia. We believe

this is very important since both these

markets are a big part of the dividend-paying

universe in Asia.

Next is Taizo Ishida who is the Lead Manager

for the Matthews Asia Growth strategy. Of our

four core regional strategies, the Matthews

Asia Growth strategy is the one that invests

across the broadest investment universe,

including companies in emerging, developed

and frontier markets of Asia. So the team seeks

to identify what it believes are the most

attractive growth companies across all of these

markets. And the strategy is compared against

the MSCI All Country Asia Pacific Index.

However, like all of our strategies at Matthews

we are “index-agnostic.” So the country and

the sector weightings that result from the

bottom-up approach may vary significantly

from this index.

And finally, we have Sharat Shroff who is the

Lead Manager for the largest of our regional

strategies, the Matthews Pacific Tiger strategy,

which seeks to identify sustainable long-term

growth companies within Asia ex Japan.

Sharat is also a Lead Manager of our Matthews

India strategy and he shares the lead

management of Matthews Pacific Tiger



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strategy, our largest retail strategy, with

Portfolio Manager Richard Gao.

We are going to cover three main things today

in our prepared remarks. First, Robert

Horrocks is going to kick off with some brief

macroeconomic updates. Second, we are going

to get a quick update from each of the four

managers here on their regional strategies that

they manage. They will discuss what has

worked well in the first five to six months of

2012, what hasn’t and what changes have

they made in their portfolios. Then finally, I

want to tackle this big question that I started

at the onset: what does all this global

uncertainty mean for the Matthews

investment team? Where is the team traveling

to? What are they looking for? What are the

questions that they are all asking of Asian

corporates? Robert, let’s kick off with you.

What does Asia look like today from a macro

perspective?

Robert Horrocks, PhD, Chief Investment Officer

Well, obviously, we are having this

conversation at a time where everybody is

worried about growth globally and

particularly about the situation in Europe, also

the U.S. and demand around the world. I

don’t want to delve too deeply into that

because I will just add one voice to the many

thousands out there discussing these issues,

but I think it is important to make clear one

thing and that is the slowing growth in Asia is

in large part due to domestic policy choices.

China is slowing because the Chinese want it

to slow after their stimulus efforts of 2009 and

2010. This is a very different scenario from

what is happening in the U.S. and Europe

where economies are slowing despite

policymakers efforts—or, some people have

argued, in the face of rather lackluster efforts

by the policymakers to stimulate them. But

they are two very different scenarios.

For me, however, when I look at the regional

picture the most important thing to look at is

valuations. And you should be able to see a

chart of the Asia ex Japan universe here [see

presentation]. This is an all-capitalization

chart showing valuations over a 20-year

history on a forward price-to-earnings ratio.

You can see, with the brown line, we are now

back to the levels similar to the Asian

financial crisis, similar to the outbreak of

SARS, the respiratory disease in China and

Hong Kong and almost at the levels of the

extreme panic during the global financial

crisis. Price-to-book measures, whereas not at

such extremes, also seem to be relatively

cheap.

Now of course you can argue that forward

price-to-earnings ratios are based on estimates

of earnings in companies, but when you dig a

little deeper and you look at what analysts are

expecting in terms of margin, really the

margin forecasts on average are not much

higher than were achieved by companies in

2009. So again, margins are comparable to a

relatively difficult period for a lot of

companies in Asia. And when you look at the

earnings per share growth estimates that

analysts are expecting, depending on how you

average it, it is really in the sort of 11% to

12% range, and maybe 15% earnings growth

over the course of the year, which is actually

not that high compared to how analyst



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forecasts tend to start the year. And also it is

not that out of line when you consider that

Asia has been growing in normal terms at 10%

to 13%, including Japan, during the crisis.

Now there is within the region some

dispersion in valuations and what we have

done is picked out some countries, some of

the major countries, and looked at Forward

P/E and dividend yield valuations in the box

at the top of this slide. These are based on

MSCI. But you can see that China now in

particular is trading at a relatively cheap level

and I think on the Forward P/E basis only

South Korea and Pakistan, within the Asian

region, are trading more cheaply than China

at the moment. And also within this and

hidden by these statistics is the fact that there

has been something of a valuation gap

starting to build between the large

capitalization and the small capitalization.

Now these have been trading quite close to

each other over the last decade or so; it is

somewhat skewed by geographical make up of

the two different classes but over the last 18

months or so, that disparity has widened by

some 10% to 15%.

Clearly, the sentiment in the market is poor.

The earnings forecast underlying valuations is

not overly optimistic and yet this all is being

achieved at an absolute level of valuations

that, relative to its own history, looks fairly

inexpensive. And if we look at the next slide

[see presentation] and break it up by sector,

you can also see that relative to the U.S. most

sectors are trading at something of a discount.

Now there is definitely some dispersion

within sectors in Asia ex Japan. Things like

health care and consumer-facing sectors are

more expensive than, in particular, financials.

But that is not unusual to see those two

sectors trading at a premium. And, again,

relative to the U.S., certainly in the consumer

area, the absolute level of these valuations

doesn’t look particularly high. These sectors

five years ago were also the most expensive

sectors in the region. So I think there has been

something of a structural trend shift in

valuations across the market. But, again, levels

look pretty reasonable, if not outright cheap

at the moment.

I wanted to say a little something about

sentiment in the overall situation in the

market. Since 2008 investors have spent a lot

of time worrying about Europe. Here are some

of the things that have happened in Asia since

2008. Asian consumption is up by over 30%

during that period. Chinese wages were up

22% last year and so far the latest figure this

year is about 14% year-on-year increase.

China is now the largest market for Porsches,

Taizo tells me. It is also the largest global

market for smartphones with a 22% market

share. The biggest home electrical appliance

brand in the world is a Chinese brand.

China is becoming an increasingly large

market for industrial robots and industry

automation, and is predicted to be the largest

by 2014. Yet quite often we hear that China is

following a low wage growth model. Quite

clearly the opposite is the case and that is the

same for Asia across the board. Asia is

following a growth model of increasing



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productivity, increasing wages, increasing

consumption. And, indeed, the amount of

GDP activity added in Asia since the financial

crisis began is roughly equivalent to two-

thirds the total current GDP of the Eurozone.

The region remains one which is producing

growth where people’s wages are increasing

and where people are getting wealthier.

Another thing that happened whilst we were

all concerned about the West was that China’s

e-commerce revenues crossed US$1 trillion a

year. Granted, a lot of this is business-to-

business activity, but also India became the

second-largest market for LinkedIn and Asia

became the biggest generator of tweets

worldwide. All of this is simply to say that

lives are changing. New ways of doing

business, new ways of putting your brand out

there, new ways of consuming and

distributing are becoming important in

China. This has an impact across the board. It

has an impact on how companies do business.

But it also has an impact on things like

property. For example, if you want to live in

the new modern society you need to be able

to live in an apartment block capable of

taking broadband, for example. And that

means urban redevelopment and we are

seeing that on a huge scale in places like

China.

Another thing that happened whilst we were

worrying about Europe was that Asia Pacific’s

high net worth individual population

exceeded Europe’s for the first time. Asia’s

population, we hear, is aging. Well, this is

true. But a lot of Asian countries are

increasing populations in the 35- to 45-year-

old range where people are at their most

productive, where people are generating a lot

of excess income that they are going to want

to start putting to work in savings products,

which means that these countries have to

develop their capital markets, which means

broader and deeper fixed income markets,

broader and deeper equity markets. This is

why China is aiming at internationalizing

Shanghai as a financial center by 2015.

Meanwhile, sentiment has had its effect on

the markets and as we have seen the

valuations in Asia have come down

significantly. Whereas Asia in 2007 was

trading at a premium to the U.S., it is now

trading at around about a 20% discount. One

market, Thailand, is still trading only about

half of the level in U.S. dollar terms that it

achieved just prior to the Asian Financial

Crisis of 1997 to 1998.

So with all the macroeconomic news in the

market at the moment, what have we been

doing at Matthews? We are not dismissive of

the macro and we are not ignorant of the

macro. But for us, it means getting out onto

the street, it means getting into Asia, it means

meeting companies that we are invested in,

meeting new possible opportunities, talking to

business people about how their companies

are fairing in the current environment. How

are markets? How is demand? How are costs

behaving? So we have been doing that as

usual this year. In the first quarter of this year

alone we spent 50 person days in India

because this was one of the markets that we

saw beaten



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down more than many others. We have also

spent a lot of time visiting and talking to

entrepreneurs and business people in China to

gauge their reaction to questions about

corporate governance and questions about a

credit squeeze and funding. And for us it

remains as it always is, a question of trying to

find the right businesses that are set up to do

well or to prosper or to have the best chance

of prospering over the next decade.

Jodi Morris

Thanks for the introductory comments,

Robert. Now, I would like to just dive into the

four regional strategies. But I just wanted to

take some time upfront and differentiate. Let’s

go through each one and talk a little bit about

how they have done year to date so far. And

why don’t we start with the least volatile of

our strategies, Matthews Asian Growth and

Income Strategy. Robert, so we will stay with

you. Can you just give us a quick update?

What worked and what has changed during

the first, five, six months here of 2012?

Robert Horrocks

Well let’s start with what was more difficult.

What was certainly more difficult in this

environment were the industrials and the

financial names, for obvious reasons.

Financials were hit by all the concerns that I

mentioned earlier. Industrials obviously have

more cyclical earning streams. These are the

sectors that bounce the hardest when markets

rally but are also the ones that are the

quickest to sell off. Certainly they have been a

drag on performance over the last 12 months

or so. On the plus side, we have seen pretty

good performance from health care names,

from telecommunications companies, from

consumer staples-type businesses. In addition

to the sectoral view, what has generally been

the case is that companies that have a greater

stability of earnings and are able to pay out

good cash dividends, are the companies that

have tended to be favored by the market.

They give a greater degree of certainty and a

greater degree of protection and that is why

this year in particular, they have tended to do

very well.

A couple of things have been happening

within the dividend yield stocks. A lot of the

yields on more cyclical sectors have been

going up recently and where we have been

able to move into those sectors and still keep

with very solid businesses, with great business

models and good capital management, we

have moved marginally into those areas. We

recently bought a large commodity

conglomerate and also a regional

conglomerate that has been in business in

Asia for 200+ years, trading at a good discount

to net asset value (NAV), with businesses

focused not only on China but also in

Southeast Asia and also paying a decent yield.

In addition, on the convertible bond side, we

are buying into a very long-dated convertible

bond, giving us 15 years or so to maturity

where we suspect that the option part of the

bond is mispriced. That is the sort of thing

that this strategy likes to go for. It gives you a

bond floor with some upside participation

should business turn around and we suspect

over a longer time period there is a greater

possibility of doing that.



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So the strategy remains the same. It looks for

these asymmetric payoffs, looks for downside

protection, looks for gaps in market

perception and reality. And, at the moment

the choice of companies trading at reasonable

valuations is quite large.

Jodi Morris

Jesper can you give us an update on Asia

Dividend Strategy?

Jesper Madsen, CFA, Portfolio Manager

Yes, Jodi. So I am going to be mirroring some

of the same sentiment that you heard from

Robert in terms of where we are looking. But

let’s just start with the last 12 months or so. I

will start with what didn’t work. If you look at

the performance over a one year period, it is

still negative and, perhaps not surprisingly,

anything that was within the cyclical sectors,

smaller companies, or any other company

that actually had less than a clear, short-term

outlook, tended to be detractors to

performance for the strategy over this 12-

month period up to May. Consumer

discretionary, financials, IT, energy and

materials—in that order—were all significant

detractors to performance.

However, we also did have some, I would say,

missteps that were caused by our own stock

picking. These were predominantly found

within the apparel maker or retail business

where we found that some of the companies

we were invested in within this space simply

did not manage to turn around the business

in order with what we had expected, what we

had discussed with management, and as a

result we did exit some of these holdings. That

said, we do maintain an exposure to smaller

companies, we do manage an all-cap strategy

and even though that did cause some

headwinds for the portfolio overall over the

last 12 months given the, again, higher

volatility within this space, we do continue to

remain invested with small and mid-sized

companies where we allocate about half the

portfolio or thereabouts.

Year-to-date, we have seen in terms of what

again hasn’t worked and I will then turn on to

what has worked. We have seen continued

headwinds within the energy sector. Again,

coal and oil have come off and some of the

exposures we have within that part of the

universe has also lagged as a result.

Now if we look at what has worked, perhaps

surprising to some, Japan has actually been a

very strong performer. Our Japanese holdings

have been the strongest performers by far for

the portfolio, especially our consumer staples

within that country. Again if you take a step

back and look at what has occurred over the

last 12 months, it shouldn’t come as a

surprise, both consumer staples as a sector has

done well and the yen has also done well on

the back of being perceived rightly or wrongly

as a safe haven currency. I should also say that

over this last fiscal year some of the strongest

performers in terms of growth in dividends

have actually come from some of our larger

cap Japanese companies.

Again, while Japan continues to be overlooked

by many investors, who might even have

adverse reactions towards it, we actually still

find that Japan plays a very important role in



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a strategy looking for both yield and dividend

growth. In terms of changes made to the

portfolio, again for the bulk of the portfolio

there will be very little change on the margin

as Robert was pointing out. Companies that

have a bit more cyclicality in their business

models and also I would say smaller cap

companies, especially in China, are areas that

we have been adding to and are looking at

with keen interest. I want to stress this is

happening at the margin especially when we

talk about the more cyclical components and

inclusions into the portfolio. But that is where

we find the most relative value compared to

some of the consumer staples that are still

trading in many cases at valuations that are

far beyond the market on the whole,

especially for those that are considered to be

safer.

And it is not again surprising given the fact

that we have a clustering of investors around

any investment in terms of themes, in terms

of companies, that seem to offer an outlook

for stability. Again that just means the flipside

of that is that if you go and seek out yield and

dividend growth in some of the less attractive

(in terms of what is perceived by the market

place as attractive) you can still find a great

deal of value within these more cyclical

businesses.

Jodi Morris

Taizo can you give us an update on the

Matthews Asia Growth strategy?

Taizo Ishida, Portfolio Manager

Sure. The Matthews Asia Growth strategy is

probably the most aggressive growth strategy

among the four we have here. As a result,

year-to-date I think the strategy is probably

doing the worst compared to Matthews Pacific

Tiger, Matthews Asian Growth and Income

and Matthews Asia Dividend strategies.

However, having said that, consumer

discretionary, which we tend to own a lot of,

didn’t actually do that badly. The best

performing stocks are casino stocks in Macau

and Cambodia. They have done very well

year-to-date. On the other hand, Chinese

small cap names have performed poorly year-

to-date. China has been in a pretty bad place,

not just year-to-date, but I think the last 12

months so this strategy tends to have a lot of

Chinese holdings and they hurt us a bit here.

One significant change I made at the

beginning of the year is that I switched from

Korean automakers to a Japanese automaker.

Now I got into Korean automakers about three

years ago, at the beginning of 2009. The stock

was trading very cheaply and they looked

attractive. Now when I look at those

companies at the time their operating margin

was only 4%. In the next three years that 4%

became 10%. The way I look at it, 10% is still

a great company and they have become

excellent companies in the last two years on a

global scale. But these stock do not have

much upside in my view now. On the other

hand, Japanese automakers got hurt in last

two years; as you know there was the

earthquake in Fukushima in March and last

summer Thailand had massive flooding that

destroyed many production bases. That really

drove the stocks to low levels. Now if you look



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at these companies; margins down 2%. The

company I own used to have 10% margin. So

I am not saying they are going back to 10% in

the next three years, but chances are margins

will expand.

The thing I want to do with the strategy is I

look at companies with good margins that are

poised to expand. That is the reason why I got

into Korean automakers three years ago. This

is the same reason I am getting into the

Japanese automakers today. So that was a

quick summary.

Jodi Morris

Yes, thanks, Taizo. And, Sharat, turning over

to you, can you give us an update on

Matthews Pacific Tiger strategy?

Sharat Shroff, CFA, Portfolio Manager

The last 12 months have been difficult for

businesses across Asia, some of which has

been forced on them and some of which is

self-inflicted, which brings me to my point on

what hasn’t worked and that would be the

Indian market, where it has really been an

issue of missed opportunities. And many of

these opportunities that were missed were

because of factors that could have been

controlled. They were not driven by

happenings externally. The domestic nature

of the economy should be a buffer to an

external environment but that didn’t work

out as anticipated. As a result, the equity

markets, the capital markets in India as well as

the currency markets endured a fairly weak

environment throughout last year. So that

didn’t help the strategy because the strategy

has carried an overweight in the Indian

market.

On the flipside, what seems to have worked

over the last 12 months is the allocation to

the technology markets. When I say tech, I

am referring to Thailand, Indonesia and the

Philippines. These markets have delivered

strong operating and fundamental

performance. Indonesia went through a

structural re-rating by the credit agencies last

year. It does seem like the Philippines, because

of the changes that have taken place, might

go through a similar experience. The

fundamental performance coming out of

these markets has been good and to a great

extent has also reflected on the valuations

that on a relative basis, the valuations in these

markets are somewhat more expensive

compared to what you find elsewhere in the

region.

On a shorter-term time horizon if we reflect

on the year-to-date, some of the factors that

have helped the strategy over the last 12

months actually seem to have worked in

reverse. So the ASEAN markets that I referred

to have experienced volatility because of

pressures coming out of Europe. Meanwhile,

we did suffer from some setbacks in South

Korea where we ended up exiting from a

particular position because of worries about

future performance. That market remains one

of the bigger detractors of performance for

this strategy year to date. In terms of what is

changing, the essence of the Matthews Pacific

Tiger strategy is to find companies that can

deliver sustainable, organic growth over the

long term. And what we are noticing is that



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there are such opportunities that are likely to

come through, and within small caps in

China, and I think you have heard that

comment from some of my colleagues already

and I will dig into that a little bit later in the

discussion. But beyond that, we have also had

some new additions within the Indian market,

realizing that the intrinsic demand for

services, for products and for solutions has

not gone away. It really is a supply side issue

and so if you can find those companies that

are still able to withstand the pressures that

are currently present, that they will surely do

well and gain market share once those

pressures start to subside. With that thought

in mind, we maintain the allocation, in fact

slightly adding or continuing to add to the

allocation in India.

Jodi Morris

Thank you, Sharat. I want to transition and

just spend some time diving into: What does

this global uncertainty mean for you as

portfolio managers here at Matthews? And

Robert alluded to a very active travel schedule

that you have all had during the first half of

2012. I think it would be interesting for all the

participants to hear where you’ve been

travelling to and what are the questions you

are asking? What are you looking for and

what are you finding? Sharat, you mentioned

small companies in China, so why don’t we

start with that because I know you spent some

time checking out the credit environment and

what it meant for those entrepreneurial

companies. Can you tell us a little bit more

about that trip?

Sharat Shroff

Sure, Jodi. Small- and mid-cap investing is

really at the heart of what we do at Matthews

and so we are always focused on finding out

how the entrepreneur is dealing with the

current business conditions and it has been

noticeable that, over the last two years in

particular, that the climate has worsened and

it has been most noticeable in China where it

is almost as if a perfect storm has descended

on the small and medium enterprises (SMEs).

With that in mind, our team redoubled their

efforts to travel across the region going to

some of the key centers like Hangzhou,

Guangzhou, and even Dongguan, over the

course of the last year and a half, just trying to

meet with these business people and to get

first hand impressions of what they were

experiencing.

I can categorize my comments in three broad

buckets as to the challenges that they have

faced. The first being excesses of the past.

Make no mistake—there were expansions and

diversifications that were reckless and that

were fueled by capital markets that were quite

amenable. I will take you back to 2006, 2007

when IPO activity was tremendous for

companies coming out of the region and even

bank liquidity was abundant. As a result of

those armed with that capital, many of these

entrepreneurs went into businesses that they

never should have. And in our discussions

with companies over the course of the last 12

to 18 months, that is a point that they kept

emphasizing is that the reason why one-fifth

of the businesses have shut down in

Guangzhou is partly of course that the

environment is difficult but mostly because



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they went into areas that they shouldn’t have.

Those that stayed true to their core expertise

have managed to survive and are continuing

to thrive. That is a clear consequence of things

that went wrong in the past and now the

results are starting to unfold.

The second issue would be somewhat more

cyclical. There are pressures of all kinds, the

demand environment in Europe is worsening,

to say the least, and even domestically within

mainland China there has been a slowdown,

depending on which sector. It could be severe

and in some instances it is a bit more

moderate. But I am not going to spend too

much time talking about the cyclical. I am

going to spend more time talking about the

structural aspects of what we learned from our

visit. The first thing that was discussed in

meeting after meeting was capital. Where do

we get capital from? The availability is limited

and if it is available it is coming in at a very

high cost. That’s not just a recent thing. This

is a structural situation.

For instance, we met with a garment

manufacturer delivering US$30 to $40 million

in sales in the last 15 years, 20 years it’s been

in business. It just hasn’t gone to the bank at

all because they believe that the doors are

always shut. 80% of the SMEs have no

recourse to bank funding. Private lending is

one way that they get around these hurdles,

but then private lending is not considered to

be an acceptable activity. It is somewhat

tainted. There are structural issues about the

availability of capital that continue to

challenge an entrepreneur when they are

thinking about starting a business or doing

something else. These kinds of structural

inadequacies can be addressed irrespective of

what the macro is doing. In some ways a

tougher macro environment raises the issue to

the highest level within the Chinese

establishment. When we returned from a

recent visit to Wenzhou, for example, two

weeks after that trip we heard that the

authorities were embarking on an experiment

which will look to legitimize private lending

and they might also consider some other

means of financial market deregulation.

These are certainly a step in the right

direction. But in spite of all that there are a lot

of challenges that these guys are facing, but in

terms of the negatives one thing that

resonated from all the meetings we had is the

save-and-invest mindset that is prevalent

across businesses in China, and that gives me

a lot of comfort. When I say that within the

strategy we are looking at including some of

the more high quality, small cap or mid-sized

companies, that is what I am getting at.

Because of the environment and governance-

related issues, a lot of companies are getting

painted with the same brush and instead of

walking away from that situation what we are

trying to do is find companies where we still

have conviction, where we still have faith,

and we know that is the best way of

participating in a difficult rebalancing that is

currently underway within China. That is

where in areas like IT services for example,

supply chain logistics we find opportunities.

Health care is where we find opportunities

that we can include in the strategy.



WC033_T 12

I would also like to focus on another aspect

which is that of inefficiencies. You heard

Robert point out that China is rapidly

becoming a market for automation. But even

today there are pockets where there is an area

where these kinds of inefficiencies still persist.

This is a picture that you will see in front of

you [see presentation] that I took in a factory

in Dongguan. This was summer of last year.

We were there to visit a pipe manufacturer.

And as we entered the factory premises, we

saw these two workers. You can see them on

the right of the picture. You can see one man

and the other one is somewhat hidden.

They were manually starting to unload this big

truck full of industrial plastic material. When

we entered the factory they had just started

the process of getting things off the truck.

Two and a half hours later after we completed

our tour, they were still going at it, trying to

empty the truck. The simple thing is that a

little bit of mechanization would make the

process much easier and more manageable.

Ironically, the banner on the building reads,

“Walk the path of quality and efficiency.”

There you have a scenario where there is still

an opportunity of getting some

mechanization into the process and

improving output.

The bottom line is, that is where our energies

and our efforts are devoted to, finding scope

for improving efficiency because that will

deliver high-quality growth, growth which is

likely to be much more sustainable. That has

been the emphasis with our recent research

trips to Asia.

Taizo Ishida

If you remember when the automakers started

installing automated production equipment

in auto companies in China it was about five

years ago. It is actually going pretty fast. 10

years ago it was not available in China. I

remember in Japan during the early 1990s,

one of the auto plants in Kyushu didn’t have

much in terms of automation equipment. The

reason was simple, cost. So you have to always

remember and compare the cost of getting a

new equipment with manpower. The way to

look at the picture is probably that it doesn’t

make sense for them to have the equipment

to replace the manpower. But that is going to

happen, I’m sure. That is exactly what

happened in the manufacturing part of it. The

service side is a little behind it, but that is a

matter of time.

Sharat Shroff

And that alludes to the sort of pressure that is

being experienced even as we speak. Labor

costs are rising at a very fast rate. In fact, we

have seen from recent statistics that show the

labor cost for state-owned enterprises being

twice that much as it for private sector

enterprises, because it is the state-owned

enterprises that are setting the pace. They are

increasing wages at a very fast level because

there is a drive to incentivize consumption

and to drive consumption growth. The private

sector is still somewhat reluctant to play catch

up but that gap is starting to widen and there

will come a point in time—and to Taizo’s

point—that mechanization if you put into the

process it is just a win/win scenario for

everybody.



WC033_T 13

Jodi Morris

I want to spend some time talking about areas

where some people haven’t spent as much

time. So Jesper, you haven’t spent as much

time in India running a dividend-oriented

strategy and then Taizo who has been

spending a lot of time going to frontier

markets will help wrap it up. Jesper, why

don’t you give us a sense for the time you’ve

spent in India, why you went and what you

found?

Jesper Madsen

Yes, India has always been a bit of a

challenging market for the Asia Dividend

strategy since its inception in 2006. The

reason is quite simple - we have a lot of good

growth companies but for the most part these

are not companies that are particularly

generous when it comes to paying out

earnings in terms of dividends, and

historically this is a market that has been

trading at a higher multiple than most of the

other markets in Asia. As a result the dividend

yield was simply not there—at least not in our

minds. As Sharat pointed out, India has been

facing some tough headwinds as of late. We

have seen a sharp depreciation in the currency

there as well as a sharp pull back in equities

there as well over the last 12 months.

We have not been invested in India for the

Matthews Asia Dividend strategy since

November 2009. So we are not in any way

driven by the fact that the benchmark is

invested there, if we cannot find that

combination of yield and growth we simply

do not invest. Now with all that said, I flew

from China, from Guangzhou and Hangzhou

where I was visiting, along with Richard Gao,

Sharat Shroff, and Hardy Zhu. We were all

conducting this trip that Sharat was just

talking about. Flying from a city like

Hangzhou or Wenzhou that are considered to

be some of the richer areas within China, to a

place like Calcutta—and I should say it is my

first experience actually in Calcutta—was like

night and day. You know you are in

Hangzhou, you are in Wenzhou, you see these

very nice business districts, it is very

impressive. People can obviously talk about

misallocation of capital but the fact is you

have some very nice buildings on the ground

in China.

In Calcutta, a city that used to be one of the

premier cities in India it is like stepping 50

years back in time. Most of it has

unfortunately been self-inflicted, government

policies and I will talk about that not so much

just in the Calcutta context but just more in

the Indian context more broadly. But before

that, it is always very encouraging going to

India because it is a very entrepreneurial

place; there is no lack of entrepreneurial

talent. That shows up in various business

models. Some of them may look like they are

copied from more developed markets but with

their own Indian twist.

For instance on the left hand side here [see

presentation] we saw a banner at one of the

companies we visited that showed how they

were trying to encourage more of a consumer

based and throw away-based mentality when

it came to home furnishings. In India

historically people do not just buy and throw

out their furniture in short order. They tend



WC033_T 14

to hold onto these items for much longer and

obviously if you are in the business of selling

furniture, you need to encourage more

turnover. That was just one example of an

innovative business model. Whether that is

going to work or not that is obviously still to

be seen.

However, that is more on the positive side. On

the negative side I have to say again it is

discouraging to some extent at least in the

short- to medium-term to hear how much the

Indian government is still interfering in the

economy. This shows up in several ways,

whether it is price controls, price settings,

subsidies, or just red tape in terms of how

capital can flow into especially infrastructure

projects that are much-needed. That slows the

down the whole process. We heard

grumblings across the spectrum, whether we

were talking to oil/gas, power equipment,

infrastructure related companies, you know all

the way to even retailers and auto

manufacturers. And as a result we didn’t just

see the result in terms of a chronic lack of

electricity outside of the main metro areas in

India but also you can see evidence right as

you drive through the streets. For instance if

you look up to the right [see presentation] you

see what a typical retail outlet looks like in

India. It is very small scale in nature and it is

highly inefficient and that drives up overall

distribution cost and that is obviously not to

the benefit of end consumption.

Now we did also see the positive potential of

India when some of this potential is

“unshackled” as I would call it. And when

private capital is actually allowed to

participate in these infrastructure projects; we

have seen it in terms of airports being built to

world standards in other places in India. But

also we have seen business parks that have

sprung up, more akin to what we would

expect to see in places like China. Again there

is great potential that I would say has been

held back to a certain extent by the Indian

government policies there. But the potential is

very much there and that is why given this

potential and much more reasonable

valuations that we for the first time in a very

long time are actually looking with very keen

interest on Indian equities.

Taizo Ishida

I have been spending a lot of time in the last

18 months visiting exciting frontier markets.

As a result our Matthews Asian Growth

strategy now has close to 10% in this market.

Now what are frontier markets? They are

Vietnam, Sri Lanka, Cambodia, Laos,

Bangladesh and Mongolia. I just visited

Mongolia in April for the first time. The

reason is very simple. Last year the Mongolian

GDP grew 17.3%. This year, it is supposed to

grow another 15%. What is happening in this

big country with a small population? 2.8

million people in a large, large country. Now,

the truth is everything is down south. When

you see that picture on the bottom right [see

presentation], that is a picture of what they

call Tavan Tolgoi coal field in Mongolia. That

is the South Gobi desert. You have to fly from

Ulaanbaatar, an hour and a half down there

and it is desert. There are two things you can

quickly notice. One is that it is very windy

and two it is just a desert, but it is huge.



WC033_T 15

That picture just shows an initial stage of

digging a hole, actually the open pit for

coking coal. This happens to be one of the

largest, and also best quality coking coal

mined anywhere in the world. What is

exciting is that this coal field is actually going

public next year provided everything goes

well. Now I can tell you more about what the

problem is, but it is exciting because this is

going to be probably a US$10 billion asset

where the total stock market capitalization of

Mongolia is only about US$1.5 billion today.

They are going to provide free shares to every

citizen in Mongolia worth US$2 billion at the

IPO time. So it remains to be seen, it is very

interesting.

The problem in Mongolia is the government.

The government is very democratic. It is

almost like India, not like China. Everybody

has to agree on everything so that is going to

take a long time and the coming election on

June 28 is going to be a pretty interesting one.

And one Mongolian observer I talked to

recently said “Oh, it doesn’t matter. It’s going

to be chaos.“ It could be interesting to watch.

But definitely, Mongolia is a place to look at

for the next 10 years or so.

Now quickly on the picture on the left [see

presentation] it is Hanoi, Vietnam. It looks

more like Singapore. Probably in the last few

years there was nothing there, it just popped

up like this. Now this was my third visit in the

last 18 months in Vietnam. The first time I

was there, in 2006, there was nothing like

that. So everything has changed, even Hanoi.

But the problem in Vietnam has been too

much growth of credit the last four, five years.

Growth of 25%, 30%, 40% every year; that

was really a concern. Inflation was very high.

Last year, inflation peaked in August at 23%.

Today, its down to 8%. So it’s very

encouraging. But at the same time, people

there are saying the environment is bad. It is a

really bad economy because they are not even

used to that sort of slow economic

environment. Probably GDP growth is going

to become more like 4% to 5% from their

traditional 6% to 6.5%. For me, that is a great

opportunity to invest in Vietnam because the

inflation is gone, the Vietnamese currency,

the dong, is very stable year-to-date. Knock

knock. But over there, people are pretty

bearish. And so this is a pretty exciting time

for me to look at these markets and I am

looking forward to increase more in these

markets in the Matthews Asia Growth

strategy.

Jodi Morris

Great. We received some questions while we

were talking here so, Robert, I want to bounce

it over to you to answer some of them.

Robert Horrocks

Yes I am going to try. I have got three or four

questions on China which I am going to try

and compose into one. They are basically

asking: how can you make sense of the low

valuations in China, also asking about fraud

and corporate governance issues in China and

how can you believe any of the statistics or

the data? And then finally the question: a

somewhat bullish Asian outlook is becoming a

consensus among many investors, what are

the warning signs and what makes us



WC033_T 16

confident about long term growth and what

are the risks involved?

If I take these in reverse order I actually

disagree with the premise that a bullish

outlook is becoming a consensus amongst

investors. This may be what people are saying

but it is not what they are doing. If you look

at the valuations in Asia, which are below

long run averages, which are below those in

the U.S. and also in some cases below those in

Europe, and if you look at the market action

recently—although people may have a bullish

long-term view, they are not willing in the

short term to implement it yet.

This would jive with what I have heard

personally from people who may express

interest in Asia but whose common phrase is

“I am waiting for the pullback.” I think it

matters whether the view is being expressed

or whether it is actually being implemented in

terms of cold hard cash. So that explains why

the valuations in China look cheap because

sentiment is very poor toward China at the

moment. And the contrarian argument at

least in the short term to good growth in Asia

is concerns about property markets, concerns

about banking quality and nonperforming

loans. If you look at valuations across the

financial sector as I showed earlier, within

Asia but particularly in China that is the

consensus. The consensus is that banks are

weak. That credit quality is deteriorating and

that property markets are overheated and that

is why you see low-digit P/Es for Chinese

banks and you see yields on some of the

Chinese property companies’ debt in the mid-

teens.

Now in terms of fraud and corporate

governance issues that has also been a big

reason behind the low sentiment in China. I

think there have been obvious situations of

bad corporate governance both in the small

cap and the large cap, it has to be said. And

how can you trust the data? Well, you never

trust the data and you never listen uncritically

to what people are telling you. But you can

trust cash. So if a company is paying you a

dividend it has the cash on the balance sheet

and it has a record of paying those dividends

then that gives you something to anchor on.

You never trust just what the CEO or the CFO

of a company tells you. You go and talk to

their competitors. You go and talk to their

suppliers and you go and talk to their clients.

Are these real businesses? Do you have a good

experience from this business? I still think

sentiment is generally very depressed

concerning Asia and China but that is why we

get out on the road and that is why we talk to

the individuals running these companies and

running their competitors.

Sharat Shroff

One quick point if I may add to the question

on governance is we spend a lot of time trying

to understand the incentive structure; the

power of incentives. If there is an incentive

for the founding family or the founding

person or the senior management to cut

corners, or for economic value to leak out of a

listed entity there is a great possibility or a

probability of something like that happening.

And for something as simple as reverse merger

companies, the very incentive structure



WC033_T 17

underneath many of these reverse merger

situations is somewhat flawed in my view.

That itself is at least an amber flag if not a full

blown red flag that there needs to be greater

scrutiny of the business model and why that

particular path was chosen. In addition to

looking at things like cash flow, it’s important

to get the incentive structure right in looking

at the board and the linkages across different

companies. In our experience, more often

than not, the reason for some kind of a

transgression on corporate malfeasance has

been the interconnected nature across

different companies, because that is when

value tends to leak out.

Jesper Madsen

I have to be fully in agreement on Robert’s

comments on the dividend in terms of how

that goes back to corporate governance. But

the initial part of that question also was kind

of hinting maybe at the moderation in growth

that we are seeing, not just in China, in India

and globally as well at least in the short term.

People or investors tend to get a little too

hung up on headline GDP growth numbers

and I have yet to see an academic study

showing a strong connection between GDP

growth and equity returns. As far as I have

seen it doesn’t hold.

It is very easy to assume that if you have a

fast-growing economy then the companies

within those economies should also do well. It

is true that they might have growth

opportunities but you also have to remember

that with every growth opportunity comes an

investment. If these companies have to invest

very heavily, it does not necessarily mean that

there is enough free cash flow to actually pay

back shareholders today or in the future. So a

moderation in growth can actually mean that

there is an expansion of free cash flow and

therefore also the ability to pay shareholders.

Jodi Morris

That is a great way to end, so we will wrap up

with that. Jesper, thanks. And thank you all

for joining us and for all of your great

questions. Matthews Asia seeks to be your

most valued resource for investing in Asia.

Please don’t hesitate to reach out and let us

know how we can assist and again thank you

all for joining us today.

Portfolio Manager RoundtableJune 7 2012

Performance results, portfolio characteristics, and holdings information in this presentation are of the largest accounts managed by Matthews International Capital Management LLC. The Performance results are net of advisory and other fees. Performance quoted represents past performance and is no guarantee of future results. Individual account performance will vary. Performance results and valuations presented are in U.S. dollars. Matthews’ advisory fees may vary depending on the size and nature of the assets and account. The standard fees are described in Part II f M tth F ADV All f i i US $ d i l d ll di id d d i t t d i li d d li d i l

June 7, 2012

II of Matthews Form ADV. All performance is in US $ and includes all dividends and interest accrued income, realized and unrealized gains or losses, accrued expenses, and are net of all brokerage commissions and execution costs and advisory and other fees.

Investing in international and markets may involve additional risks, such as social and political instability, market illiquidity, exchange-rate fluctuations, a high level of volatility and limited regulation. Fixed income investments are subject to additional risks, including, but not limited to, interest rate, credit and inflation risks. In addition, single-country and sector strategies may be subject to a higher degree of market risk than diversified strategies because of concentration in a specific industry, sector or geographic location. Investing in small- and mid-size companies is more risky than investing in large companies as they may be more volatile and less liquid than large companies.y g g p y y q g p

The subject matter contained herein has been derived from several sources believed to be reliable and accurate at the time of compilation. Matthews International Capital Management, LLC does not accept any liability for losses either direct or consequential caused by the use of this information. Please see important disclosures at the end of this presentation.

The views and information discussed in this report are as of the date of publication, are subject to change and may not reflect the presenters’ current views. The views expressed represent an assessment of market conditions at a specific point in time, are opinions only and should not be relied upon as investment advice regarding a particular investment or markets in general. Such information does not constitute a recommendation to buy or sell g g p g yspecific securities or investment vehicles.

Do not duplicate or reproduce.

©2012 Matthews International Capital Management, LLC WC033

Today’s Moderator and Speakers

Jodi Morris, CFA, CFP®

ModeratorJesper Madsen, CFA

Portfolio ManagerAsia Dividend and

Robert Horrocks, PhDCIO and Portfolio Manager

Asian Growth and Income StrategyChina Dividend Strategies

y

Sharat Shroff, CFAPortfolio Manager

Pacific Tiger and India Strategies

Taizo IshidaPortfolio Manager

Asia Growth andJapan Strategies

Do not duplicate or reproduce.©2012 Matthews International Capital Management, LLC WC033

India Strategiesp g1

Matthews Asia Investment Strategies

Asian Growth and Income Asia Dividend Asia Growth Pacific Tiger

Lead PortfolioManager(s)

Robert Horrocks, PhD Jesper Madsen, CFA Taizo Ishida Sharat Shroff, CFA

Approach Attempts to offer a more stable means of participating

Invests in income-paying equities; seeks

Seeks to identify the most attractive growth

Seeks to identify companies capable ofstable means of participating

in Asia’s growth while providing some downside protection.

equities; seeks combination of current income and dividend growth.

attractive growth companies across Asia’s developed, emerging, and frontier markets.

companies capable of delivering sustainable organic growth.

Holdings Dividend-paying securities Equities of companies Equities of domestically Equities of domesticallyHoldings Dividend paying securities and fixed income securities, such as convertible bonds and corporate bonds.

Equities of companies with attractive yields relative to the potential for dividend growth.

Equities of domestically oriented companies, including Japanese companies benefitting from regional integration in Asia.

Equities of domesticallyoriented companies; selectively seeks globally competitive companies.

Geographic Coverage Asia Asia Asia Asia ex-Japan

Primary Benchmark MSCI AC Asia ex Japan Index

MSCI AC AsiaPacific Index

MSCI AC Asia Pacific Index

MSCI AC Asia ex Japan Index


2

Asian ValuationsAsia Pacific ex Japan (May 1992 – 2012)

4.525.0

Asia Pacific ex Japan (May 1992 2012)

ForwardP/E

Dividend Yield

China 8.5x 3.8%Hong Kong 13 6x 3 5%

3.5

4.0

20.0

tio

Hong Kong 13.6x 3.5%India 12.9x 2.1%Japan 20.1x 2.9%Emerging & Frontier Asia 10.2x 3.0%U.S. 12.6x 2.2%E 9 3 4 5%

2.5

3.015.0

war

d P

/E R

at

B R

atio

Europe 9.3x 4.5%

1.5

2.010.0

Forw

P/B

0.5

1.05.0Asian Financial Crisis SARS Outbreak Global Financial Crisis

0.00.0May 92 May 94 May 96 May 98 May 00 May 02 May 04 May 06 May 08 May 10 May 12

Asia ex-Japan Forward P/E Asia ex-Japan P/B Linear (Asia ex-Japan Forward P/E)

Past yields are not a guarantee of future yields.


3Past yields are not a guarantee of future yields.Source: FactSet Research Systems, JP Morgan, Forward P/E and Dividend Yield for constituents of MSCI Indices; Data as of 5/29/12.

Asia ex-Japan is attractive compared to U.S.Sector BreakdownSector Breakdown

Forward P/E

Asia ex-Japan U.S.

Telecommunication Services 11.8x 21.4x

Financials 7.4x 11.5x

Industrials 10.0x 12.4x

Utilities 11.0x 15.2x

Consumer Staples and Discretionary 12.5x 15.0x

Energy 12.7x 15.5x

Materials 10.9x 10.0x

Information Technology 11.7x 12.0x

Health Care 16.0x 13.5x


4Source: FactSet Research Systems and MICM, Data as of 5/31/12

While we have been worrying about Europe

Si 2008Since 2008–

Asian consumption grew by over 30%

China’s e-commerce revenues topped US$1trillion

At 3 3 million Asia-Pacific’s population of high net worthAt 3.3 million, Asia-Pacific s population of high net worth individuals exceeds Europe’s for the first time

Asia’s P/E ratio relative to the U S is at a 20% discountAsia s P/E ratio relative to the U.S. is at a 20% discount


5

Investment Returns | Asian Growth and Income StrategyAs of May 31, 2012As of May 31, 2012

AVERAGE ANNUAL TOTAL RETURNS

9.55%11.50% 10.25%8.98% 10.87%

YTD 1 Year 3 Years 5 Years 10 YearsSince Inception

(9/12/94)


1

4.45% 3.35%2.95%1.21%

3.26%

-8.67%

-17.64%Asian Growth and Income StrategyMSCI AC Asia ex Japan Index

1 Index return calculated from 8/31/94.

Performance results are of the largest account in the noted strategy managed by Matthews International Capital Management, LLC. The performance results are net of advisory and other fees. Matthews’ advisory fees may vary depending on the size and nature of the assets and account. All performance is in US$ and includes all dividends and interest accrued income, realized andunrealized gains or losses, accrued expenses, and are net of all brokerage commissions and execution costs and advisory and other fees. Individual account performance will vary. Performance quoted represents past performance and is no guarantee of future results.


6Sources: BNY Mellon Investment Servicing, Bloomberg, MICM

Investment Returns | Asia Dividend StrategyAs of May 31, 2012

YTD 1 Y 3 Y 5 Y Si I ti

As of May 31, 2012


4.15%

13.27%

6.09% 6.39%8.81%

YTD 1 Year 3 Years 5 Years Since Inception (10/31/06)

4.15%0.12%

-3.10%-0.34%

-7.75%

-14.89%Asia Dividend Strategy

Asia Dividend Strategy total return contributionsAsia Dividend Strategy total return contributions from dividends and their reinvestment


Performance results are of the largest account in the noted strategy managed by Matthews International Capital Management, LLC. The performance results are net of advisory and other fees. Matthews’ advisory fees may vary depending on the size and nature of the assets and account. All performance is in US$ and includes all dividends and interest accrued income, realized and unrealized gains or losses, accrued expenses, and are net of all brokerage commissions and execution costs and advisory and other fees. Individual account performance will vary. Performance quoted represents past performance and is no guarantee of future results.


Sources: BNY Mellon Investment Servicing, Bloomberg, MICM 7

Investment Returns | Asia Growth StrategyAs of May 31, 2012As of May 31, 2012


10.84%8.52%

6 09% 6 03%

YTD 1 Year 3 Years 5 YearsSince inception

(10/31/03)

2.02% 1.21%0.12%

6.09%

-3.10%

6.03%

-12.73%-14.89%

Asia Growth Strategy


Performance results are of the largest account in the noted strategy managed by Matthews International Capital Management, g gy g y gLLC. The performance results are net of advisory and other fees. Matthews’ advisory fees may vary depending on the size and nature of the assets and account. All performance is in US$ and includes all dividends and interest accrued income, realized andunrealized gains or losses, accrued expenses, and are net of all brokerage commissions and execution costs and advisory and other fees. Individual account performance will vary. Performance quoted represents past performance and is no guarantee of future results.


8Sources: BNY Mellon Investment Servicing, Bloomberg, MICM

Investment Returns | Pacific Tiger StrategyAs of May 31, 2012As of May 31, 2012

Since Inception


1

1 18%

11.93%

4.19%

13.36%

8.40%

2.95%

8.98%

1.21%

10.87%

3.26%

YTD 1 Year 3 Years 5 Years 10 Yearsp

(9/12/94)

1.18%

-12.96%

1.21%

-17.64% Pacific Tiger Strategy

MSCI AC Asia ex Japan Index

1 Index return calculated from 8/31/94.

Performance results are of the largest account in the noted strategy managed by Matthews International Capital Management, C f f f ’ fLLC. The performance results are net of advisory and other fees. Matthews’ advisory fees may vary depending on the size and

nature of the assets and account. All performance is in US$ and includes all dividends and interest accrued income, realized andunrealized gains or losses, accrued expenses, and are net of all brokerage commissions and execution costs and advisory and other fees. Individual account performance will vary. Performance quoted represents past performance and is no guarantee of future results. S BNY M ll I S i i Bl b MICM


Sources: BNY Mellon Investment Servicing, Bloomberg, MICM 9

Recent Visits with Chinese Entrepreneurs

View of Wenzhou, China Investment Team members Jesper Madsen, CFA, Richard Gaod H d Zh t th H h R il St tiand Hardy Zhu at the Hangzhou Railway Station


10

“Walk the path of quality and efficiency”

Factory in Dongguan, China


11

Good Ideas Out of India

Typical retail outlet

Home furnishings store encourages consumerism by offering money for used furniture


12Unshackling India’s potential

Recent Visit to Frontier Markets

Ulaanbaatar, Mongolia

Newly developed area of western Hanoi VietnamNewly developed area of western Hanoi, Vietnam


13Tavan Tolgoi coal field, Mongolia

This document does not constitute investment advice or an offer to provide investment advisory or investment management services, or the solicitation of an offer to provide investment advisory or investment management services, in any jurisdiction in which an offer or solicitation would be unlawful under the securities law of that

Important Disclosuresjurisdiction. This document is directed at and intended for institutional investors (as such term is defined in the various jurisdictions). This document is provided on a confidential basis for informational purposes only and may not be reproduced in any form or transmitted to any person without authorization from Matthews International Capital Management, LLC.

Investors should ascertain from their professional advisers the consequences of investing with Matthews under the relevant laws of the jurisdictions to which they are subject including the tax consequences and any exchange control requirement. Investors should carefully consider the investment objectives, risks, charges and expenses of any strategy before making an investment decisionexpenses of any strategy before making an investment decision.

Past performance is not indicative of future results. As with any investment there is always potential for gains as well as the possibility of losses.

These materials are intended for informational and discussion purposes only. To the extent that these materials are circulated, it is intended that they be circulated only to persons to whom they may lawfully be distributed and any recipient of these materials should inform themselves about and observe any applicable legal requirements. Persons who do not fall within such descriptions may not act upon the information contained in these materials.

The information presented in these materials is believed to be materially correct at the time of compilation but no representation or warranty (express or implied) isThe information presented in these materials is believed to be materially correct at the time of compilation, but no representation or warranty (express or implied) is made as to the accuracy or completeness of any of this information. Nothing set out in these materials is or shall be relied as a promise or representation as to the future. There is no guarantee that a company or the companies in a portfolio will pay or continue to pay dividends.

The manager referred to in these materials means a U.S.-based investment adviser registered with the U.S. Securities and Exchange Commission who has not represented and will not represent that it is otherwise registered with any other regulator or regulatory body.

An investment in certain of the strategies is subject to interest rate risk, which is the possibility that a strategy’s yield will decline due to falling interest rates and the g j , p y gy y gpotential for bond prices to fall as interest rates rise. The value of debt securities may be affected by the ability of issuers to make principal and interest payments. The strategies may invest in the following: derivatives which can be volatile and affect performance; high yield bonds (junk bonds) which can subject a strategy to substantial risk of loss; and structured investments which can change the risk or return, or replicate the risk or return of an underlying asset.

The MSCI All Country Asia ex Japan Index is a free float–adjusted market capitalization–weighted index of the stock markets of China, Hong Kong, India, Indonesia, Malaysia, Philippines, Singapore, South Korea, Taiwan and Thailand. The Matthews Asian Growth and Income and the Matthews Pacific Tiger Strategies may invest in countries that are not included in the MSCI All Country Asia ex Japan Index. It is not possible to invest directly in an index.in countries that are not included in the MSCI All Country Asia ex Japan Index. It is not possible to invest directly in an index.

The MSCI All Country Asia Pacific Index is a free float-adjusted market capitalization–weighted index of the stock markets of Australia, China, Hong Kong, India, Indonesia, Japan, Malaysia, New Zealand, Philippines, Singapore, South Korea, Taiwan and Thailand. The Matthews Asia Dividend Strategy may invest in countries that are not included in the MSCI All Country Asia Pacific Index. It is not possible to invest directly in an index.

The MSCI China Index is a free-float weighted index of Chinese equities. The MSCI Hong Kong Index is a free-float weighted index of HK equities. The MSCI Japan Index is a free-float weighted index of Japanese equities. The MSCI India Index is a free-float weighted equity index of Indian equities. The MSCI Emerging and Frontier Asia Index is a free-float weighted index of the stock markets of Bangladesh, China, India, Indonesia, Korea, Malaysia, Pakistan, Philippines ,Sri Lanka, Taiwan, Thailand and Vietnam. The MSCI USA Index is a free float adjusted market capitalization index that is designed to measure large and mid cap U.S. equity market performance. The MSCI Europe Index is a free-float adjusted market capitalization weighted index that is designed to measure the equity market performance of the developed markets in Europe consisting of Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, and the United Kingdom.

The forecasted priced per earnings ratio is calculated by dividing the market price per share by the expected earnings per share for a12 month period The forward


The forecasted priced per earnings ratio is calculated by dividing the market price per share by the expected earnings per share for a12 month period. The forward dividend yield uses the stock's latest declared dividend payment and annualizes it over the next 12 months. 14

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