matthews asia webcast december 12, 2012 portfolio manager...

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

Strategy

Jesper Madsen, CFA, Portfolio Manager, Matthews Asia

Dividend and China Dividend Strategies

Teresa Kong, CFA, Portfolio Manager, Matthews Asia

Strategic Income Strategy

Richard Gao, Portfolio Manager, Matthews Pacific Tiger,

China and China Small Companies Strategies

Presentation

Jodi Morris, CFA, CFP®—Moderator

Good afternoon; this is Jodi Morris and I would like to

thank you all for participating in today’s year-end

Matthews Portfolio Manager Roundtable. On our

quarterly webcasts we alternate between educational

discussions and a mid-year and year-end Portfolio

Manager Roundtables. We will hear from a collection

of Matthews lead managers who are going to share

with us some updates on the regional Asia strategies

they manage. So as would befit a year-end discussion,

we will reflect on some of the major events of 2012.

We’ll also discuss what investors should focus on in

the midst of the current environment—which is one I

characterize as slowing global growth. So as it pertains

to investing in Asia, in a slowing growth environment

what really matters and what doesn’t? We’ll share

what it means for the Asia equity and fixed income

strategies that we manage at Matthews. I’m joined

today by four lead managers of various Matthews

equity and fixed income strategies. They’re part of a

30-plus person team here at Matthews which manages

nearly US$20 billion exclusively in Asian assets. We

take a very long-term, bottom-up approach to

investing in the region and that is why the team is

based in San Francisco, spending significant time

together but then on the ground doing research trips

throughout the region.

That emphasis on long-term fundamental research is

something critical that underlies all 13 of our

Matthews Asia investment strategies. So today we’re

going to highlight several of these Asian equity and

fixed income strategies.

To kick off first is Teresa Kong. Teresa is the Lead

Manager of the Matthews Asia Strategic Income

Strategy. This is Matthews’ dedicated fixed income

offering. If global debt benchmarks are under-allocated

to Asia, we believe it’s very important that investors

consider having a dedicated Asia fixed income

allocation.

This strategy invests bottom up, in corporate and

sovereign debt across Asia. It may also selectively hold

December 12, 2012

MATTHEWS ASIA WEBCAST—PORTFOLIO MANAGER ROUNDTABLE | DECEMBER 12, 2012

©2012 Matthews International Capital Management, LLC 2 WC035_T

convertible bonds and even dividend-paying equities.

It’s a mix of currencies—a mix of local currencies and

U.S. dollars reflecting that bottom-up view.

Moving onto our equity strategies, we have Robert

Horrocks. Robert has two roles—the first is as our

Chief Investment Officer. He is also the Lead Manager

of the Matthews Asian Growth and Income Strategy.

This strategy is designed to be the least volatile of

Matthews core equity strategies. Downside protection

is literally part of its objective. So it invests in equities

with solid dividends, convertible bonds and

selectively some straight debt as well. And although it

is compared to the MSCI All Country Asia ex Japan

Index, it may hold securities in countries outside of

the Index—Japan for example.

Thirdly, Lead Manager of our Matthews Asia Dividend

Strategy is Jesper Madsen. The objective of Asia

Dividend is total return, and it achieves this by

investing in dividend-paying equities across Asia and

those equities may be in developed Asia, including

Japan and Australia as well.

Most important is not only that the companies pay

dividends, but we emphasize those that have the

ability to grow their dividend streams. While lower

volatility isn’t part of the objective as it is with the

case of the Matthews Asian Growth and Income

Strategy, it may be a result of this dividend focus.

Over the past five years, if you look at both the

Matthews Asian Growth and Income and Asia

Dividend Strategies, both have offered lower volatility

when compared to Asian indices but also in

comparison with a lot of other markets, includingthe

S&P500 Index. I should point out that Jesper also

leads the Matthews China Dividend Strategy, which

follows a similar discipline to that which he uses in

the Matthews Asia Dividend Strategy but specifically

invests within China, Hong Kong and Taiwan.

Finally, Richard Gao. Richard shares lead

management for the largest of Matthews regional

strategies, the Matthews Pacific Tiger Strategy. He

shares that role with Sharat Shroff. The Matthews

Pacific Tiger Strategy seeks to identify sustainable

long-term growth companies within Asia ex Japan.

Richard is also the Lead Manager of our Matthews

China Strategy and I believe he’s actually one of the

longest-tenured China fund managers in the United

States.

Today, we’re going to kick off with some

macroeconomic backdrop and we’ll start with

Robert Horrocks to do that. Second, we’re going to get

a quick update from each lead manager on their

regional Asia strategy and just talk about what

worked, what didn’t work over the last year and how

the strategy is positioned for what their outlook is in

2013. And finally let’s just tackle that question, what

does this global uncertainty and this slowing growth

environment mean for the Matthews investment

team? What is the impact of slowing growth in

China; over recent political transitions? What does

that mean for the opportunities, the risk, that the

team here is focused on.

Robert, let’s start with you. You’ve just returned from

Hong Kong last weekend. Do you have any major

takeaways from your visit?

Robert Horrocks, PhD, Chief Investment Officer

Yes. I was surprised by the level of pessimism, or to

put it perhaps more accurately, lack of belief in



China. I sat down with some former colleagues based

in Hong Kong and we were having a discussion about

China and I found myself on the opposite side of

every argument that they had. And it’s not that they

didn’t have solid points about the financial system or

about the earnings profile of some of the companies

or some of the sectors, or the way the country was

changing. But they were doing so in the context of

looking at GDP growth in the recent past, which has

slowed from 10% real to nearer to 7% real and I think

from a sentiment point of view, it just colored the

way they looked at things. I was, as they put it, the

non-consensus view at the table and my repost to

them was that at 9X forward 12 months earnings*,

3% dividend yield and nominal GDP rates of growth

in the long run that are probably going to be around

10%—slightly above or below—I was quite happy

being “non-consensus.” But it got me to thinking

about the way that GDP growth rates can impact your

thinking as an investor, and I wanted to spend a little

bit of time talking about that.

The first thing to say is that looking at things from a

GDP growth rate is too high level because GDP

growth rates can vary distinctly across the region, so

you might be seeing slower growths in some parts and

faster growth in other parts. But more importantly

even within countries there are different regions and

different parts of the country that might be growing

at different rates. Richard will talk a little bit about

this later in the context of China.

The second thing is it’s all about your time horizon.

We could stipulate the facts for the sake of argument

(*Forward 12 months earnings represent the current price per share

divided by estimated earnings per share expected for the following 12

months, according to FactSet)

as to how fast a region is going to grow over the long

run but if you have a 12-month time horizon, as

growth rates slow, you’re going to become

progressively more pessimistic because you’re

pursuing a momentum-based strategy; whereas

slowing growth rates or falling markets for a long-

term investor actually have completely the opposite

reaction. It tends to make you more positive. And I

think there’s an element of this in my colleagues in

Hong Kong.

The third thing I want to say, though, is there is

actually very little evidence for a correlation between

market performance and GDP growth over the long

run, anyway, and this chart (see presentation) is just

trying to explain a little bit about that. Here we have

three different economies with three different

nominal rates of growth ranging from below 10% to

almost 20% year-on-year and yet the book value per

share growth of the markets underlying it have been

broadly similar. And there are many reasons for this.

You can have a different sectoral make-up of the

markets than you do to the economy. You can have a

change in composition in the markets over time as

new companies are listed. And there’s also of course

capital management and corporate governance.

Remember, what matters to the investor ultimately is

per share returns not the headline rate of growth in

the economy itself.

So be careful about being too macro. And be careful

about being too short term in your macro view. I

would say that here at Matthews ultimately we do not

invest in countries. We invest in companies and

governments and fast growth is no panacea for bad

macro management or poor corporate governance.

Ultimately, you have to ask yourself, and what we are



concerned about, is not so much whether the growth

over the next 12 months will be 10% or 7% in China.

Rather we ask the question how will this growth be

achieved? Which sectors, products or companies are

well placed to benefit over the long run? How are the

governments behaving and what are the challenges

posed for policymakers?

Teresa Kong, CFA, Portfolio Manager

Yes, as a consequence of this lower growth

environment central banks across the entire Asian

region have been very busy stimulating their

economies. This has driven interest rates to historical

lows. Looking at the region, we really have three large

groups of interest rates. There are what we call the 5%

range in the 10-year mark. These countries include

Indonesia and the Philippines. There is a core group

of countries with 10-year bonds yielding around 3%.

That would include Thailand, Malaysia, China and

South Korea. And then even a group of countries that

yield fairly close to zero and their monetary policies

are either explicitly or implicitly linked to that of the

U.S. and those countries include Singapore,

Hong Kong and Taiwan.

The point here is that not only are we talking about a

lower-growth environment—this environment is also

characterized by relatively low inflation, which is

what enabled these policymakers to be so active in

stimulating their economies, and also historically low

risk-free rates.

Jesper Madsen, CFA, Portfolio Manager

Yes. Just to sum up again what Teresa is saying there,

obviously we have seen a compression in all things

nominal whether it’s growth in GDP, or perhaps even

to some extent at times earnings growth. What wasn’t

mentioned here is also inflation, as well as low yields.

And I do want to stress in that kind of environment,

and we don’t have a crystal ball, we don’t know how

long this will continue for, but in this kind of

environment the dependency at least in part and in

greater part on the dividend becomes more

important. Because again, I think, depending on who

you talk to they will have various estimates or needs

for what they need to see in terms of total return out

of Asia as a long-term holder. On an annualized basis

I hear everything from 8% to around 12%. But the

fact is if you can take 3% to 4% of that 10% on

average by the dividend, which comes with a lot less

variability, that becomes much more important to

your total return as well.

Robert Horrocks

I would like to just spend a little bit of time now

talking about valuations. This is a chart (see

presentation) that will be familiar to those who have

attended our webcasts before. I’ve just updated the

regional valuations. This is Asia ex Japan on a forward

price-to-earnings basis and the blue line is a price-to-

book basis. The message is similar to what it has been

for the past few quarters; we’re still below historic

averages. This series is a fairly mean-reverting series

over this time period. Whenever we’re below that

historic average it tells me that a lot more of the

pessimistic view of the market is factored into

investors’ actions than the optimistic. Indeed if you

look at the box below the valuation lines—and these

are based on MSCI data—you will see that China and

Asia ex Japan are now trading at a discount to the

U.S., and Asia itself on a par with Europe almost. And

we’re looking at dividend yields in China and Asia ex

Japan as a whole that are clearly in excess of what you

would get in the U.S. and above long-run averages. So



again, very little expectations in the markets in my

view for long-run growth. I think people are focusing

a lot more on the 12-month view.

I would like to say one thing about the variation in

valuations across sectors in the markets at the

moment. Although the markets are cheaper relative to

historical averages on a long-term view for the

aggregate, there are definitely some sectors above

their historic averages. If you look at these they

include health services, consumer non-durables and

consumer services. What this really is, is a reflection

of businesses that are consumer-facing where the

earnings streams and the revenue growth is more

predictable; whereas if you look down at those in the

blue which are much cheaper than historic averages

you see things like producer manufacturing, finance—

much more cyclical businesses. So I think what you

have in the markets as a whole today is a focus on the

short term slowing rates of growth and therefore a

falling confidence or a loss in confidence of the long-

term view in Asia.

Jodi Morris

So with that perspective let’s move on to what all this

means for the strategies that all of you lead here at

Matthews. Teresa we will start with you and then

move over to the equity strategies. But in the case of

the Matthews Asia Strategic Income Strategy, if you

look back at 2012 what worked; what didn’t work and

what are you doing now? How are you positioning

the Strategy as we enter 2013?

Teresa Kong

First, what worked. As you have already mentioned,

Jodi, the Asia Strategic Income Strategy is a blended

strategy of both external currencies—so largely U.S.

dollar-denominated debt—as well as Asia-

denominated debt. The first thing that really worked

is our higher allocation to U.S. dollar-denominated

debt versus local currency-denominated debt.

Now this may sound somewhat counterintuitive

because, on the whole, Asian currencies actually

appreciated relative to the U.S. dollar by an order of

magnitude of about 2.5%, if you exclude Japan.

However, credit spreads tightened so much in the U.S.

dollar universe that it more than offset that

depreciation of the U.S. dollar. This was especially the

case in sub-investment grade or high yields where

credit spreads tightened by almost 300 basis points

(3.0%).

The other thing that worked was actually our local

currency allocation to the Philippine peso. Who

would have guessed that the Philippine peso was

actually the best-performing Asian currency year-to-

date. And a lot of that is actually predicated on real

structural improvements and it is very much driven

by internal growth both in consumption as well as

the service sector in that country.

What hasn’t worked? Well, it was a really unusual

year in that just about everything went up, so it was

actually hard for us to find something that detracted

from performance. So I will just mention the fact that

for part of the year we did have a small U.S. interest

rate hedge and that is meant to neutralize the

underlying interest rate risk that we have in our U.S.

dollar-denominated debt. And since U.S. rates fell

over that short period of time the hedge actually

marginally detracted from return.



And, finally, in terms of what changed and what our

outlook is, first I’ll just touch on some of the changes

we had made over the course of the year. We

continually increased our allocation away from

governments and toward corporates as we find more

diversifying and compelling opportunities in Asian

corporates. The second change that we made through

the course of the year was a shift in allocation away

from Indonesian rupiah-denominated debt to

Philippine peso-denominated debt and, as I

mentioned, that obviously helped us as the Philippine

peso outperformed.

In terms of outlook for next year, while we certainly

don’t think that the asset class is likely to produce

another double-digit return, we still see neutral

deposit return drivers. We will talk about each of

these in turn.

First, we’ve already talked about interest rates. Interest

rates will cap returns from falling yields because they

are already close to absolute low yields. On the other

hand, we don’t see interest rates going up any time

soon, so we think as a contribution to returns,

interest rates will likely be immaterial. On a credit

front we still see room for credit spreads to tighten,

but not by a lot. Corporate balance sheets are still

relatively underleveraged and we don’t see default

rates going up substantially because balance sheets are

still pristine. And then finally on a currency front it is

always difficult to predict what goes on with

currencies, especially given such a short horizon of a

year. But we still do see very positive technicals as the

region continues to attract foreign capital, both in

foreign direct investment as well as the portfolio

flows.

Jodi Morris

Moving onto equities, Robert can you kick us off with

the Matthews Asian Growth and Income Strategy?

Robert Horrocks

Yes. You know the strategy did well with its exposure

to Singapore in particular. I suspect this may be a

technical issue here in that the liquidity within the

Singaporean market has been pretty strong. But in

general the businesses you find there are well

managed. They pay good dividends. They have had

excellent execution and a lot of exposure to the

Southeast Asian region, which has been going

through a bit of a credit cycle recently—places like

Thailand, Indonesia and the Philippines—and some

Singaporean-domiciled companies have been an

excellent, solid way of accessing some of that better

business environment.

I would say when I look at the Strategy as a whole, it

is noticeable that businesses that had a strong

competitive position in their industry—quasi-

monopolistic kinds of positions—obviously are able

to better work their way through a low-growth

environment. We’ve seen a lot of those businesses

perform well as marginal players have probably been

eked out of those industries.

What hasn’t worked so well? I guess there has been

mixed performance amongst some of the financial

companies. In general, what has tended to do better

are the broad, more diverse regional businesses, and

what has been less successful have been some of the

more focused country-specific businesses.

Regarding convertible bonds, I’ve been a little bit

disappointed at the make-up of the convertible bond

universe over the past couple of years. This continues



to be the case. The attraction of owning a convertible

bond is to have the protection of a bond floor with

the optionality of an equity upside. But in too many

cases we’ve seen the credit-worthiness of the

company has not been that strong. That tends to be

the case of companies that issue convertible bonds so

we have not seen the performance from those and the

protection from those that we would have wanted all

the time. That being said, the allocation remains low

at, in historic terms, just under 15%. But we have

found some new ideas at the margin and for us when

we’re looking to move into more cyclical industries,

convertible bonds are a good way of doing it. I would

say, at the margin, the discipline of the dividend

strategy pushes you into slightly more cyclical

businesses, such as industrials. But then again the

dividend is used as a sign of quality not a sign of

distress. You are looking for the growth in that

dividend. I think Jesper’s talk will probably reflect this

too.

Jesper Madsen

Yes, Robert, obviously I will mirror some of your

commentary on Singapore. Again that was one of the

drivers for the Matthews Asia Dividend Strategy. Here

we had especially high-yielding equities with fairly

predictable earnings, such as REITS, that performed

quite well. And not overly surprising given this was a

year where “boring” and “predictable” have been, as

Robert was also mentioning, in vogue. So again

financials, consumer staples and quantitative easing

definitely helped the REITS—the Real Estate

Investment Trust Space—which saw compression in

dividend yields especially after the announcement of

QE3, or the “quantitative easing three” measure, as

it’s been called. Again, because you benefit as a REIT

from lower funding costs, you still have fairly healthy

rental aversion. On top of that, you have a

compression in the capitalization rates or the value of

your underlying real estate, so all in all you have a lot

of things moving in your favor.

Now what didn’t work so well was our small

allocation to energy and materials in the materials

sector. That again, given what we said about

“predictability” and “boring” being in vogue,

obviously energy and materials, given the outlook on

GDP growth or the slowdown and the uncertainty

around that, was the exact opposite. That’s why we

saw some selloff within those sectors.

Now another sector I believe got hit mainly because

of the lack of an ability or willingness to take on risk

or any kind of uncertainty was the small-

capitalization space. Again, because these are often

times businesses that are perhaps faster growing and

have good long-term growth outlooks, but obviously

they are more risky in terms of having maybe just one

business line, one small niche although granted it

might be growing. Or it may have just one country

focus, but that was not what the marketplace was

looking for this year and as such this part of the

portfolio did not perform as well as the large and

midcaps. We also had some specific issues in some of

our South Korean holdings as well.

Now in terms of changes, as Robert also mentioned I

would say one of the benefits of the Matthews Asia

Dividend Strategy is its objective of total return. Just

to take a step back, that means how much you’re

being paid today and how much you can also see

coming from capital appreciation that would be

backed up by the growth in underlying dividends.

and that’s why it’s very important to stress that we’re



still looking for growth but its growth in long-term

dividends.

Now how we navigate that space—we can at times

put more emphasis on the current yield, and that will

often times happen when markets are running very

hot, like we saw back in 2006 and 2007, for instance. I

would say with more focus on some of the stable

higher yielding, perhaps at times slower-growing, part

of the equity space, my attention has been

predominantly on some of the faster-growing parts of

the portfolio so we are now tilting our focus toward

finding growth in dividends rather than relying as

much on the current yield paid today. And with the

uncertainty we have seen disparity in valuations, as

Robert pointed out, and we’re trying to take

advantage of that—and have been doing so for the

last six to eight months—by putting that marginal

dollar to work in more cyclical companies. However,

these are still companies that are leaders within their

various spaces. So they are businesses that are growing

through the cycle but they do have more exposure to

the economic cycle and there’s not much we can do

about that. But again, they are companies that are

growing their dividends through the cycle.

Jodi Morris

Thanks and moving on to our growth oriented

strategies, representing the Matthews Pacific Tiger

Strategy, Richard can you give us the story for 2012

and your thoughts for entering 2013.

Richard Gao, Portfolio Manager

Sure, Jodi. So for the Matthews Pacific Tiger Strategy

what worked so far this year? First of all it’s been the

ASEAN (Association of Southeast Asian Nations)

countries, including countries like Indonesia,

Thailand and the Philippines. They continued to

perform very strongly this year and our overweight

positions in these regions have really benefited us

very well. In recent years, the stock markets of ASEAN

countries have been re-rated. We have seen growing

numbers of middle class consumers and the rise of

consumer spending all across the region in ASEAN. I

think ASEAN countries also learned a very hard lesson

from the Asian Financial Crisis back in 1997 and

these days the corporates in ASEAN countries care

more about minority shareholders and about the

profitability of the companies, rather than just taking

away market share and increasing debt. So that has

worked well.

In addition, our holdings in financials, which

includes banks and property companies, especially in

ASEAN countries, did well—as have consumer staple

companies so far this year.

This strategy also benefited from its overweight

position in India this year. India’s domestic economy

is relatively immune to the economic uncertainties

outside of the country; and we are also very

encouraged to see the reform progress accelerating in

that country.

So in terms of what hasn’t worked this year—

definitely China was a big underperformer relative to

other parts of the markets in Asia. China’s economy

has been slowing down very significantly this year

and the slowdown has particularly affected consumer

sentiment in China.

Our investments in the consumer-related companies

in the past have accumulated quite decent gains until

the end of last year. So overall the relative valuation



for the China-related consumer companies are much

higher than those peer groups in China. In this slow

growing environment and weak consumer sentiment

environment we are seeing that those relatively high

valuation types of consumer stocks were under

particularly strong selling pressure. That is why our

holdings in this sector have shown relatively weak

performance so far this year.

What have we been doing so far this year? We have

consolidated some of our China consumer positions

and trimmed down some of the companies that do

not meet our criteria. On the other hand, we have

also added more in the companies that have

remained relatively solid during this tough

environment. We have also been increasing the

weightings in the health care positions, as well as the

utility positions, and have been adding more

positions and weighting in India.

And very quickly on outlook, next year we think the

growth will come back for both top-line GDP and

corporate profit. So it’s going to be a generally

stronger growth environment. Strong growth in the

ASEAN countries should remain but overall the

valuations may be much higher than their historic

averages. On the other hand, China is looking much

more attractive at this point of valuations. We are

looking to increase our weightings in some selected

consumer-related areas in China in the coming year.

Jodi Morris

Great, thanks, Richard. So as I listen to all of you I am

hearing that the main theme is yield, or as Jesper likes

to say “boring things,” did really well last year. The

natural question then is, because of the strong returns

in yield-focused securities, can that continue in 2013?

Why don’t I just throw this over to Teresa and Jesper

to comment.

Teresa Kong

Great question. As we always talk about in

international fixed income, there are three key drivers

of returns—credit, currencies and interest rates. And

as Jodi already pointed out, we’re already sitting at

historically low yields so we don’t really expect a lot

of performance to come from falling yields. However,

I alluded to the fact that high yield returns have been

quite good over the last year and we think that there’s

actually still more room for a spread to compress. So

looking at this chart (see presentation), this is our

attempt at making an apples-to-apples comparison

between Asia credit and U.S. credit. What you see

before you is the orange line that represents Asia

investment grade yields and we’re comparing that

with the blue line which represents U.S. investment

grade yields. As you can see, historically, Asia fixed

income does offer a spread pick-up relative to the U.S.

And currently that differential, at least in investment

grade space, is still 86 basis points (0.86%) which is

quite a bit higher than the long term historical

average of about 39 basis points (0.39%). So we still

see some room for contributions from spread

compression, international fixed income, specifically

in Asia fixed income. And we think that that will be

something that we’ll be counting on given the low-

yield environment.

Jesper Madsen

Jodi, you are correct. Pursuing a yield-based strategy

has been a pretty good place to be over the last year

and a bit. But that said, if you look at history, and I

think history is always a good guide, through time

dividends again have always been an important



component of your total return out of Asia. It might

come and go. Certain years we will have tremendous

capital gains and people forget the importance of

dividends, but over time, the slow grind of dividends

for the investor will make the difference to the total

return.

So if we just take a look here at what I mean with

history as well, I am a big believer that people have to

focus on what really matters. I think that’s what we’re

all trying to say here in our own respective ways. And

what matters is not the short term and it’s not the

earnings that are being reported on a quarterly or

even annual basis; what matters is what happens over

the long term—three, five, 10 years and through the

cycle.

So what I’ve tried to put up here on a slide (see

presentation) is basically the growth in dividends that

we’ve seen over the last 16 years in the Asia Pacific

region for a group of companies. What you can see

here is that we’ve had three periods of very extreme

volatility and cuts in earnings—during the Asian

Financial Crisis, the dot.com bust and then the

Global Financial Crisis, but as you can see during

these periods actual dividends held firm and it was

only through the Asian Financial Crisis that we had

one year where we had negative growth in dividends;

all other years in a rolling three-year period would

have given you a positive growth in dividends. And

that’s important to stress.

Now if you look at the last recession, the Global

Financial Crisis, earnings came off by about 50%

while dividends only fell by basically in the mid-

single digits. So, again, there is a propensity to

maintain the dividend even when things get tough in

Asia.

Robert Horrocks

What I am really happy about from the CIO

perspective is that both Teresa and Jesper are focusing

not just on the absolute level of yield, but yield with

some kind of cushion. And, as Teresa said, she is

looking for the cushion from mispriced quality credits

and Jesper is looking at the cushion in terms of the

underlying growth in that dividend over time. I think

too many people in this environment are just

reaching for the highest-yielding asset they can find

and I think they don’t realize the risks embedded in

that.

Jesper Madsen

Thanks, Robert. I think the underlying question that

everybody has asked themselves is: can dividends

continue to grow then, given what we’re talking

about today? So let’s look at a couple of factors.

First and foremost, as I said, this is a good measure of

earnings growth for the cycle. Dividends have pretty

much grown in line with earnings growth. It just

happens that some years you will have earnings drop

when dividends do not drop as much, the expansion

and the payout ratio as a result. But if you look at the

payout ratio today it’s sitting in the high 30s, around

38, which does not in any way indicate any global

history. If you look at the ability of these companies

to pay out, they are stretching to pay out these

dividends and that’s important.

Also if we look at the corporate leverage it is sitting at

the low end alongside the capital expenditure

intensity of many of the business models that we now



see in Asia; they’ve become less capital intensive, and

as a result they have more to pay out to shareholders.

And also if we take one step back and look at our

space here in the U.S., as Robert was pointing out

with the valuation chart earlier, we’re still getting a

yield pick-up by going to Asia around 75 to 80 basis

points (0.75% and 0.80%). That is in spite of

dividends historically having grown at a much faster

rate in Asia compared to that of the U.S. So 16% for

Asia Pacific since 2002–2011 compared to 7% for the

S&P 500 Index. And granted I would say this year I

would expect to see a growth spurt out of U.S.

companies, but remember this is driven by tax

changes and is not about sustainability in earnings

either. And what is given to you today in many cases

means that there will be less around to be given to

you tomorrow when you have these kinds of shifts

due to taxation changes.

This is not what is playing out in Asia. There we see

more family ownership. These families are interested

in extracting value from these businesses over the

long term. We like that. We want to be in the same

boat as them and it also gives, I would say, a set-up

that is much more sustainable.

Jodi Morris

Great, thanks Jesper. So we can’t have a roundtable

here talking about investing in a low-growth

environment without talking specifically about

China. By far the most common questions we were

getting for the webcast centered on China GDP

growth, both the number and the nature of that

growth. Richard, what is your perspective? What do

you look at with regards to that GDP number? How is

the nature of that changing and how does that

impact your thinking as an investor?

Richard Gao

Yes, so Jodi, China has gone through a very

challenging period so far this year. Its economic

growth has been coming down very significantly

from the previous about 9% to 10% to the current

about 7.5%. Although next year the growth on top-

line GDP may recover a bit from here, it is unlikely

that China’s growth will return to its previous levels

of between 9% to 10% in the next decade.

China’s growth in the past relied more on the exports

and the fixed-asset investment growth. But going

forward, the growth driver will increasingly come

from the domestic consumption areas, especially from

the service-oriented industries. And this shifting of

the growth model is already happening. As you can

see from this chart (see presentation), the service

oriented industries contribution to China’s GDP is

already going up to about 43% level over the past

three years. And it is the government’s focus and

intention that China’s service sector contribution will

be around 50% by the end of the year 2015. We

believe there are good growth opportunities in the

service sector in China. Take for example, China’s

health care industry. China’s health care spending

has been growing at an average of about 20% in the

past five years and this is expected to accelerate the

growth in the near future. And also in the area of IT

such as the E-Commerce area, total E-Commerce

transactions in China reached more than

approximately US$700 billion in the year 2000 and

this is expected to reach US$2.8 trillion in the year

2015.

Another area of future growth will likely come from

the middle and Western part of China. China’s

economy has different levels of development at the



current stage. The Eastern coastal regions have a

much more developed economy than the areas in the

middle and Western parts. This is actually a very

interesting chart (see presentation) put out by

The Economist magazine which shows the different

provinces’ income level equivalent to different

countries in the world. So you can see that in the

Eastern parts of China the income levels are closer to

the developed countries, while in the middle and

Western parts of China they are closer to the

developing nations. And in recent years we’re seeing

the income growth rate of the Western and rural areas

catching up with the growth rate of the Eastern part

of China. China currently has about a 50%

urbanization rate. The government has been

supporting the growth of urbanization and more

growth will come out of the West and rural areas of

China going forward.

Overall, China’s economy will definitely shift to a

lower gear but for us at Matthews, I really want to

echo what Robert has said in the past. We really care

less about the top-line GDP growth rate, whether it’s

7% or 9%. What we really care more about is the

underlying economy of the companies that we invest

in. So in the changing environment that we see right

now we will continue to work hard to find companies

with long-term sustainable business models and

companies which are building up their brand names

and distribution channels and R&D; and most

importantly, companies that are managed by a

robust, solid management team.

Teresa Kong

What I find really interesting about what Richard is

saying is that China is shifting into a lower gear. But

let’s examine for a moment what this lower gear

means in terms of magnitude. To help me get my

head around this quantity of 7% growth, I’d like to

actually ground these numbers in reference points

that I can point to. So given that we live in the state

of California, one of the things that I did was let’s just

ask ourselves, what does 7% slower growth translate

into in terms of just power plants? How many power

plants need to be built to support the 7% growth?

So if you take a look at this graph (see presentation),

the total install capacity of power in China is about

1,100 gigawatts. So 7% growth means that in order to

support that growth, given an energy multiplier of

about 1, China would need to build 77 gigawatts per

year to support that growth. Now let’s compare that

number of 77 gigawatts with the entire install

capacity of the State of California. As of last year the

entire install capacity of California is 70 gigawatts

which means that just for China to keep up with its

five year plan, it would need to build an entire State’s

worth—California’s worth—of power plants every

year just to keep up with this growth. And this also

illustrates how we think about some of the data issues

that comes up in China. Many investors ask us, “Can

you trust the data?” and one way that we really look

at countries where the number may not necessarily be

that trustworthy, is to actually look from the bottom

up. Look at the actual company by company and

sector by sector data. And in fact we know that last

year China actually put in 86 gigawatts of new install

capacity. So that helps us really understand where

that growth is coming from.

And perhaps even more interesting than the quantity

of this growth is the quality of this growth. As

Richard has mentioned, where are people moving to?

They are moving to the West. What type of businesses



will support this greater urbanization in the West?

And from a fixed income perspective we are especially

interested in companies that have stability and are

likely to grow prudently and to generate enough free

cash flow to leverage over time. And within that

context we’ve found a couple of gas and water

companies within China that we think will be good

attractive investments over the long run.

Jodi Morris

Another question we’ve been asked about that is

clearly on all our minds too is the recent leadership

transition in China. We were clearly focused on all

these issues and thinking through reforms. So what

does this mean for a host of things, including the

Chinese financial system, the currency etc. Robert, I’ll

kick that over to you to start.

Robert Horrocks

Yes. From my perspective Chinese leadership changes

have become less exciting over time. It used to be that

whenever there was a leadership change, there was a

huge amount of gossip stirred up in Hong Kong.

That’s the case now but the gossip is less interesting

because the changes are less important.

You used to have a very stark left wing/right wing

split in China. That does not exist to the same degree

as it used to. You used to have a very stark old versus

young generation split; with the old revolutionaries

that had been there during the civil wars and the

birth of the Communist Party still being around and

pulling strings. That does not exist anymore; there’s a

much more collegiate view. So I think this really is

more a change of personnel and nuances than

anything else and this current leadership will put in

place or continue to put in place the plan that was

initiated a couple of years ago.

Now we did have one question about its impact on

the capital markets. I don’t know if that was meant

from a short-term perspective in terms of would it

boost the markets. It might. There might be a relief

rally in some respects. But I think the impact on the

capital markets in terms of structural reform is far

more important. This leadership is committed to

creating an international financial center in Shanghai.

In order to do that, it seems inconceivable that they

wouldn’t liberalize the renminbi. In order to liberalize

the renminbi, which would create a huge Chinese

demand for overseas assets, you need to create an

overseas demand for Chinese assets and that means

better capital market structures; better accounting;

better auditing processes; stronger culture of

corporate governance.

So I suspect that capital markets as an objective

reform over the next five to 10 years is going to be

very important indeed, including perhaps the further

development of the corporate bond market.

Richard Gao

I just want to mention, as a side note, that China’s

new Communist Secretary is currently visiting

Guangdong and the places that Chinese leader Deng

Xiaoping used to visit when he started the reform and

opened all policy in the early 1990s. I mention this

because I believe the new leadership is sending out

quite a strong signal that they will carry on the

reform policies going forward. And I do believe that

economically they are going to specifically focus on

how to stimulate domestic demand and switch

China’s growth model from one of relying on exports



and fixed assets to the new model of increased

reliance on domestic consumption.

Jodi Morris

Great, thanks, Richard. I’m going to stick with you a

minute here because we’ve also gotten some

questions on what else should we be watching in

emerging Asian countries? India’s been asked about.

You referenced ASEAN and India in some of your

remarks so can you give us some more thoughts

there? What specific things are you seeing, any

specific countries of interest in ASEAN? We also got

asked about Japan as well so maybe I’ll toss that over

to Jesper after you’ve completed.

Richard Gao

Sure, yes. As I mentioned briefly, in ASEAN we are

seeing a lot of interesting and exciting developments

in those countries. We are seeing very strong growth

of middle class consumers out of the ASEAN

countries. And on the corporate side, they really tend

to focus more on the profitability of companies rather

than just taking away market share.

So we are seeing a middle class in the ASEAN

countries, and in Asia as a whole, that is becoming

more and more integrated. In the past, the ASEAN

countries, and Asia as a whole, relied more on trade

relations with countries outside the region, like the

U.S. and the E.U. But now we are seeing that the

integration of the economy between Asian countries

and between the ASEAN region countries has

increased very strongly. And this is really a very good

sign for the economic growth going forward and for

the income growth for the domestic consumption

growth within ASEAN regions.

Jesper Madsen

And if I could jump in with a quick comment as well,

Jodi, since I was just in Jakarta about two weeks ago. I

would definitely have to say that that’s a country that

has definitely benefited—and it’s not just hype—in

terms of the equity space, but it has benefited from a

more stable political regime there over the last few

years. I remember vividly going there for the first time

around 2000 and, at that point in time, the country

was still reeling from the effects of the Asian Financial

Crisis; it was a bit of an outcast especially in the eyes

of international companies that had a very hard time

basically investing in the country because it was so

uncertain as to what the future would bring and the

political stability.

I remember vividly walking down the street and

having kids basically throw rocks at me for being

foreign. That’s not happening anymore. Instead you

are sitting in a lot of traffic in Jakarta where it takes

you sometimes hours to get from one meeting to

another even though it’s just a mile or so on the map.

But that’s obviously a stark reminder that the country

has come a long way. Car ownership and ownership

of two-wheelers have grown tremendously. We’ve

also even heard that in real estate and industrials, a

lot of foreign companies are now clamouring to get a

footprint in Indonesia to cater to Indonesian

household as well as to use it in terms of an export

base. But the fact is that some countries, as Richard

has pointed out, have really come a long way over the

last five years or so.

Jodi Morris

Anything on Japan?



Jesper Madsen

Yes, Japan is a very stark contrast to Jakarta and we’ve

got a question here about whether or not it’s a

perpetual value trap. Well, I know there’s a lot of

negative sentiment and has been for a mighty long

time on Japan. I think, again, just like we’ve said

today, you have to look past the topline and headline

data. Japan is a very large economy with a

tremendous amount of world-class companies, and

what is also interesting is a lot of these companies are

now relying increasingly on the rest of Asia, and

particularly China, for their future growth.

And I just want to stress that for the Matthews Asia

Dividend Strategy we are not benchmark driven but

we still have about 22% or thereabouts of the

portfolio allocated there and the simple reason is

because we want to be there, because we can find

those companies to fit the mandate of growing and

yielding equities, and we are finding those companies

that are increasingly growing with the rest of Asia. I

am not going to get too hung up on whether or not

they reside and have their headquarters in Japan if

they’re delivering earnings driven out of Asia.

Jodi Morris

Great. Richard, just for clarification, someone has

asked if you could define ASEAN so could you give us

some examples of countries in ASEAN?

Richard Gao

ASEAN nations are countries like Indonesia, the

Philippines, Thailand, Vietnam, Malaysia and

Singapore.

Teresa Kong

Perhaps I’ll just talk a little bit about what ASEAN

represents in a fixed income Strategy because ASEAN

is a very important part of our Strategy. And as we

have heard from Jesper, Indonesia is firing on all

cylinders. Another country that is actually quite

interesting as you have heard is the Philippines. We

are really beginning to see thoughtful growth. And

what I mean by thoughtful is that the government is

actually thinking very strategically about where they

can get companies to invest to guarantee them a good

rate of return but also benefit the local economy as

well. And one of those sectors is the casino sector.

They’ve granted four licences. They’ve required these

companies to invest a specific amount of money in it.

But they’ve also guaranteed that they will have that

area which they are working very hard to build up in

terms of infrastructure, which is only about 10

minutes away from the airport. So this is just one

example that is thoughtful development that is really

going to be internally driven because most of the

participants in that casino market are really going to

be the mass market coming from the Philippines.

Another country that is also growing is Thailand. And

that is really the result of some good investment after

a decade of underinvestment within the region. On

the fixed income side, we are somewhat worried

about what this means from a fiscal budget

perspective. This does mean that they have been and

will continue to issue bonds from a supply side. But

we really are seeing this translate into real free cash

flow generation and deepening of the capital markets,

whether we’re talking about banks and the retails

need and demands for things like mutual funds and

insurance products. So away from China, we are



definitely seeing some good internal domestically

driven growth coming from the ASEAN region.

Jodi Morris

Thanks, Teresa. Well we’ve covered a lot of ground

today—China and the broader Asia regions. Our

original conversation here was just investing in

slowing growth, slower growth environments. So let’s

end the call, if that would be helpful, to just go

around the table here and one last thought from each

of you on what investing in a lower growth

environment means per your Strategy. Teresa?

Teresa Kong

We are still seeing strong credit, room for

appreciation on our currency side and stable yields.

So with those three key drivers of return, we’re still

positive on Asia bonds as a really good way to

diversity a portfolio and get good risk adjusted

returns.

Robert Horrocks

I think you still have to anchor off valuations. For the

Matthews Asian Growth and Income Strategy I think

you have to look at the protection you get from low

valuations you get in a solid business, and I think a

low growth environment is depressed sentiment and

depressed valuations.

Jesper Madsen

And, again, I’ll mirror some of Robert’s comments

and just take note of the fact that dividends and

dividend yield in Asia is still not expensive. While it

has contracted in certain parts of the market, it has

expanded in others. And on the whole I still think

Asia is one of the only regions globally that can

deliver on both yield and also have some growth

optionality embedded there as well.

Richard Gao

For the Matthews Pacific Tiger Strategy, I think even

in this relatively lower growth environment we are

still able to find good growth-type companies in the

region, and the most important thing is to really

focus on the company fundamentals. We can find

good growth companies in a lower growth

environment. There are also bad companies in a high

growth environment, so it is really important to find

the companies with the right business model and the

right management team.

Jodi Morris

I think that’s a great summary and I would say the

overall lesson is we can see the macro headlines, but

all of you basically gave reasons why it’s worth

looking under the headlines; to look at valuations; to

look for growth; to consider that low yields mean low

cost of capital and that’s a good thing; and that

strategy matters. You can look at dividends and

growing dividends in a region and it really varies

across the region.

At Matthews we seek to be your resource for investing

in Asia, so please don’t hesitate to reach out to us if

you have questions or if there is any way in which we

can assist you.

Portfolio Manager Roundtable

December 12, 2012ecember , 0

Investing in international and emerging 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

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

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.

The subject matter contained herein has been derived from several sources believed to be reliable and accurate at the time of compilation. Matthews

investment advice regarding a particular investment or markets in general. Such information does not constitute a recommendation to buy or sell specific securities or investment vehicles.

© 2012 Matthews International Capital Management, LLC WC035 1

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.

Today’s Speakers and Moderatory p

Asia Strategic IncomeAsian Growthand Income

Asia Dividend and China Dividend

Pacific Tigerand China

T K CFA J M d CFAR b t H k PhD Ri h d GTeresa Kong, CFAPortfolio Manager

Jesper Madsen, CFAPortfolio Manager

Robert Horrocks, PhDCIO and Portfolio Manager

Richard GaoPortfolio Manager

Jodi Morris, CFA, CFP®

Moderator


Matthews Asia Investment Strategies

Asia Strategic Income Asian Growth and Income Asia Dividend/China Dividend

Pacific Tiger/China

Lead Teresa Kong, CFA Robert Horrocks, PhD Jesper Madsen, CFA Richard Gao

g

Manager(s)

Approach Seeks total return through credit, currencies, and interest rates via a fundamental, bottom‐up investment process.

Attempts to offer a more stable means of participating in Asia’s growth while providing some downside protection.

Invests in income‐paying equities;seeks combination of current income and dividend growth.

Seeks to identify companies capable of delivering sustainable organic growth.

Holdings Primarily bonds and other debt securities of Asian corporate and sovereign issuers in both local and external currencies. Invests across currencies and the capital structure

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 companies with attractive yields relative to the potential for dividend growth

Equities of domesticallyoriented companies; selectively seeks globally competitive companies/Equities of domestically oriented companiesstructure. potential for dividend growth. oriented companies.

Geography Asia (Dev, EM) Asia (Dev, EM) Asia (Dev, EM)/ China, Taiwan Asia ex‐Japan (Dev, EM)/China, Taiwan

h k HSBC A i L l B d I d MSCI AC A i J I d MSCI AC A i P ifi I d / MSCI AC A i J I d /Benchmark HSBC Asian Local Bond Index MSCI AC Asia ex Japan Index MSCI AC Asia Pacific Index/MSCI China Index

MSCI AC Asia ex Japan Index/MSCI China Index

Inception 2011 1994 2006/ 2009 1994/ 1998


Corporate Growth Does Not Necessarily Track GDP Growthp yBook Value per Share Growth in Three Asian Economies

3.0

3.5

Nominal GDP Growth Averaged17.3% per annum

2.5 Nominal GDP Growth Averaged4.4% per annum

1.5

2.0

Nominal GDP Growth Averaged

1.0Dec 04 Dec 05 Dec 06 Dec 07 Dec 08 Dec 09 Dec 10 Dec 11

Chi A t li I di

Nominal GDP Growth Averaged15.5% per annum

China Australia India


Source: FactSet Research Systems; Data as of 10/25/12

Asian Valuations

4.525.0

Forward P/E Ratio P/B Ratio

Asia ex Japan (Nov 1992 – Nov 2012)

3.0

3.5

4.0

20.0

1.5

2.0

2.5

10.0

15.0

0 0

0.5

1.0

0 0

5.0Asian Financial Crisis SARS Outbreak Global Financial Crisis

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

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

China Hong Kong U.S Europe Asia ex Japan

The forward price per earnings ratio (“Forward P/E”) is calculated by dividing the market price per share by theexpected earnings per share for a 12 month period. Forward P/E was calculated as of 11/30/12 using data from

Forward P/E 9.7x 15.3x 12.8x 10.8x 11.6x

Dividend Yield (%) 3.3 3.0 2.4 4.1 3.2


JPMorgan and is forward looking. There is no guarantee that Forward P/E will be achieved. Past yields are not aguarantee of future yields. Sources: FactSet Research Systems, JP Morgan, MICM; Asia ex Japan data as of 11/30/12

Attractiveness of Valuations Varies by SectoryAsia ex Japan Sectors

Consumer Non‐Durables

Health Services

Non‐Energy Minerals

Process Industries

Health Technology

Consumer Services

Industrial Services

Electronic Technology

Communications

Retail Trade

Consumer Durables

Commercial Services

Transportation

Technology Services

Energy Minerals

Industrial Services

Finance

Producer Manufacturing

Distribution Services

Utilities

‐1.5 ‐1 ‐0.5 0 0.5 1

Cheaper than average More expensive than average


Current price to book value and price to forward earnings versus ten‐year monthly average of standard deviationsaway from the mean; Source: FactSet Research Systems; Data as of 11/14/12

Asia Strategic Income Strategy

What WorkedHigher allocation to USD versus local currency denominated debt worked as USD debt outperformed

g gy

— Higher allocation to USD versus local‐currency denominated debt worked as USD debt outperformed local debt

— Within the local currencies, our high allocations to Philippine Peso contributed to performance as it was the best performing Asia currency (12/30/11 – 11/30/12)

What Hasn’t— A small tactical position to protect against rising U.S. interest rates marginally detracted from returns

Recent Changes and Outlook— Increased allocation from governments to corporates

— Increased allocation from Indonesia to Philippines (local currency debt)

— Historically low absolute interest rates will cap returns from falling yields

The statements above are based on the beliefs and assumptions of our portfolio management team and on the information currently available to our team at the time of such statements. Although we believe that the expectations


reflected in these statements are reasonable, we can give no assurance that these expectations will prove to be correct. Year to date as of 11/30/12.

Asian Growth and Income Strategy

What WorkedSingapore holdings

gy

— Singapore holdings

— Companies with more predictable earning streams

What Hasn’t— Mixed performance from Financials and other cyclicals

— Some convertible bond positions

Recent Changes and O tlookRecent Changes and Outlook— Trimmed away smaller positions

— Added to Japan positions

Hi h i ldi t k i li l t— Higher‐yielding stocks now in more cyclical sectors

— Added to positions in industrial names

— Convertible bonds remain at just under 15%




Asia Dividend Strategy

What WorkedSingapore listed holdings (Consumer Staples Industrials and Financials)

gy

— Singapore listed holdings (Consumer Staples, Industrials and Financials)

— Financials and Consumer Staples

What Hasn’t— Materials and Energy

— Small capitalization companies

— Specific South Korean holdings

Recent Changes and Outlook— Greater emphasis on dividend growth

— Increased exposure to cyclical companies of quality




Pacific Tiger Strategy

What WorkedASEAN Financials and Consumer Staples

g gy

— ASEAN Financials and Consumer Staples

— Indian domestic oriented companies

What Hasn’t— Chinese slowdown has led to selling pressure on consumer stocks

Recent Changes and Outlook— Consolidated our Consumer positions in China

— Added to Health Care and Utilities

— Increased weightings in India



reflected in these statements are reasonable, we can give no assurance that these expectations will prove to be correct.Year to date as of 11/30/12.

Asia Fixed IncomeAsia credit still offers higher yield than comparable U.S. credit

INVESTMENT GRADE YIELDS

8%

9%

10%

6%

7%

3%

4%

5%

Current Differential 0.86%

A (7 i d) 0 39%

2%

Average (7‐yr period) 0.39%

U.S. Investment Grade Yield Asia Investment Grade Yield (USD)

U.S. Investment Grade Yield is the yield to maturity on the Bank of America Merrill Lynch US Corporate Master index;Asia Investment Grade Yield is the yield to maturity on the JP Morgan JACI Corporates Investment Grade index; Past


yields are not a guarantee of future yields; Sources: JP Morgan and Bank of America; Data as of 12/10/12

Focus On What Matters – Growth in DividendsDividend and earnings growth for MSCI Asia Pacific constituents

Total Dividends in US$B3% 50%

160

180‐53% ‐44% ‐50%

100

120

140

60

80

100

20

40

01996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Total Dividends Cumulative Fall in Earnings


Past performance is not indicative of future results.Sources: FactSet Research Systems and MICM

China’s Services Sectors Are Growing as a Percent of China’s GDPgServices Sector (% of GDP)

44.0%% of GDP

43.0%

43.5%

41.5%

42.0%

42.5%

40.5%

41.0%

39.0%

39.5%

40.0%

38.5%2002 2003 2004 2005 2006 2007 2008 2009 2010 2011


Source: CEIC as of 12/6/12

Diversity of China’s Economyy yFuture growth coming from mid and western China

GDP PER PERSON, 2010, IN THOUSANDS, AT PPP


PPP is Purchasing Power ParitySource: The Economist, February 2011

Magnitude of “Slower” Growth is Still TremendousgEnergy demands continue to rise

CHINACHINA

CALIFORNIA

Installed capacity: 1,100 GWEvery year: 7% x 1,100 GW = 77 GW Installed capacity: 70 GW≈


GW is giggawatt; Sources: China Electricity Council and the State of California

DisclosureThis 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 jurisdiction. 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 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) 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.

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 the Asia Strategic Income Strategy is subject to credit, currency and interest rate risks. Credit risk is the change in the value of debt securities reflecting the ability and willingness of issuers to make principal and interest payments Currency risk is a decline in value of a foreign currency relative to the U S dollar which reduces the value of the foreign currency and investmentsissuers to make principal and interest payments. Currency risk is a decline in value of a foreign currency relative to the U.S. dollar which reduces the value of the foreign currency and investments denominated in that currency. Interest rate risk is the possibility that a Strategy’s yield will decline due to falling interest rates and the potential for bond prices to fall as interest rates rise. The strategy may invest in the following: derivatives which can be volatile and affect Strategy performance; high yield bonds (junk bonds) which can subject the 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 Strategy is subject to risks associated with investing in a concentrated strategy, and the value of the Strategy will be greatly affected by the fluctuations in the value of a single security.

Yield to worst is the lowest potential yield that can be received on a bond without the issuer actually defaulting.

The HSBC Asian Local Bond Index (ALBI) tracks the total return performance of a bond portfolio consisting of local currency denominated high quality and liquid bonds in Asia ex Japan The ALBIThe HSBC Asian Local Bond Index (ALBI) tracks the total return performance of a bond portfolio consisting of local‐currency denominated, high quality and liquid bonds in Asia ex‐Japan. The ALBI includes bonds from the following countries: Korea, Hong Kong, India, Singapore, Taiwan, Malaysia, Thailand, Philippines, Indonesia and China.

The J.P. Morgan Asia Credit Index (JACI) tracks the total return performance of the Asia fixed‐rate dollar bond market. JACI is a market cap‐weighted index comprising sovereign, quasi‐sovereign and corporate bonds and is partitioned by country, sector and credit rating. JACI includes bonds from the following countries: China, Hong Kong, India, Indonesia, Korea, Malaysia, Philippines, Thailand and Singapore.

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 exSouth 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.

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 MSCI China Index is a free float–adjusted market capitalization–weighted index of Chinese equities that includes China‐affiliated corporations and H shares listed on the Hong Kong Exchange, and B shares listed on the Shanghai and Shenzhen exchanges.


matthews asia webcast december 12, 2012 portfolio manager...

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