The hunt for Chinese dividends

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Sherwood Zhang, co-manager of the Matthews China Dividend Fund, finds wide variance among sectors that pay dividends and those that don’t.

The hunt for Chinese dividends

 

 

Zhang, based in Matthews Asia’s San Francisco office, told FSA that the investment team evaluates companies for their ability to pay and increase dividends over time. Valuations are important, but management quality, business mix and company fundamentals are also evaluated.

At the forefront is the banking sector. China’s banks tend to pay relatively high dividends.

China Construction Bank, for example, has consistently been one of the top 10 biggest dividend in the world, according to a Henderson dividend study. Currently the bank’s H-share listing pays a dividend yield of about 5%. China’s other leading banks such as ICBC and Bank of China, pay roughly 5.5% and 5.3%, respectively.

But state ownership complicates the picture.

“The financial sector, which is dominated by Chinese banks, is challenging for investors due to its state-owned nature,” Zhang said.

He explained that China’s state-owned enterprises (SOEs) currently lack a system that would hold management accountable.

“For example, if you are a top executive of an SOE, and you made a wrong decision that resulted in a huge loss, worst case is you are reshuffled to another government job.”

Transparency is also an issue, and some asset mangers have concerns that the actual value of non-performing loans on bank balance sheets has not been revealed to investors.

Currency concerns

Financials account for the second largest sector in the firm’s dividend fund. But it is underweight the sector relative to its benchmark, the MSCI China Index, especially on Chinese banks listed in Hong Kong, according to Zhang.

“A weakening renminbi due to trade tension [with the US] will surely lead investors to start worrying about this sector again. Chinese bank assets are mostly denominated in renminbi, while their stock prices are quoted in Hong Kong dollars, which is pegged to the US dollar,” he explained.

Zhang, however, still sees opportunity in the broader financials sector, particularly in the insurance and asset management businesses, which have strong growth potential, he said.

No dividend mindset

Over the past few years, China’s regulators have introduced measures to encourage listed companies to pay more dividends to shareholders. The aim is to promote long-term investing over short-term speculation.

Yet the largest sector on the MSCI China Index, information technology, has few dividend paying companies. 

“Too often these entrepreneurs believe that profits should be completely left with them to capture the next exciting opportunity,” Zhang said.

But Zhang believes that mindset is changing and some of his fund’s IT sector companies are setting an example by paying and growing dividends.

Like financials, IT represents one of the top sectors in the fund, but it is underweight the benchmark, according to the fund’s factsheet.

Top 5 sector allocations (%)

Sector

Fund

Benchmark

Consumer discretionary

16.2 

9.3 

Financials

14.6 

25.8 

Information technology

14.2 

32.9 

Industrials

13.8 

5.5 

Telecom services

9.8 

7.6 

 Source: Matthews Asia

 

Consumer sectors

Zhang finds opportunity in consumer-related sectors, such as consumer discretionary, healthcare and consumer staples. 

“[Healthcare sector] valuations have come down in the past few years and Chinese consumers are willing to pay for premium products and better services,” he said.

On the flipside, Zhang finds highly cyclical sectors, such as energy and basic materials, a challenge. According to him, commodity price volatility makes the forecasts for earnings, cash flow and dividends unreliable.

In terms of company size, mid-caps are more stable and profitable than small-caps and can better support dividend payments. Mid-caps have also not maxed out their growth potential when compared to large-caps, he added.

His fund is overweight small- and mid-caps, while underweight mega- and large-cap companies, according to Zhang.

 


The three-year cumulative performance (to 8 March) of the Matthews Asia Dividend Fund versus its benchmark, the MSCI China, according to FE data.

The fund has slightly lower volatility of 18.29 than the benchmark’s 21.25, FE data shows.

Fund NAV and index are in US dollars.

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