EX-99.1 2 fp0036557_ex991.htm

 

Manager's Commentary

 

Market Review

The Greater China equity markets retreated slightly in September 2018 as the trade war with the United States escalated. The US administration imposed tariffs on an additional 200 billion US dollars ("USD") of Chinese goods - meaning that now more than half of the Chinese imports into the US carry new penalty tariffs - and China retaliated with new duties on 60 billion USD of US imports. In addition, economic data indicated that economic momentum in China was slowing. The Caixin-Markit purchasing index for the manufacturing sector hit a 14-month low in August 2018 while fixed-asset investment grew just 5.3% in the first eight months of the year, the lowest figure since at least 1995. Taiwan equities held up relatively well during September, helped by the steady performance of the semiconductor giant, Taiwan Semiconductor Manufacturing Co., Ltd..

 

Fund Review

The China Fund, Inc. (the "Fund") outperformed its benchmark in September. Stock selection within information technology and utilities, as well as overweight positions in energy helped with performance. In particular, the top two contributors were both oil companies - Petro China Co., Ltd. and China Oilfield Services Ltd. The Fund added to this sector over the past few months as we believe the previous bearish expectations on oil prices were already priced in and a pick up in the capital expenditure cycle by the major oil explorers should help lift the demand for oil service providers in particular. Another source of alpha came from utility operators with structural growth potential, including a natural gas distributor and a wind farm operator. The Fund added these companies when the market was ignoring them and chasing high growth last year. When sentiment turned more cautious in 2018, investors started to appreciate these growth utilities with sustainable growth profile and long term potential.

 

On the negative front, the Fund suffered from its positioning in Macau casino operators, including holdings in Galaxy Entertainment Group, Ltd. Share prices in these types of companies have been recently impacted by concerns over onshore liquidity in China as well as Renminbi weakness which could drag gaming revenue growth. However, data is still suggesting high single digits of gaming revenue growth while street expectations are revised lower. Valuations of select high quality names are also attractive.

 

Outlook

The recent deterioration in United States-China relations seems to suggest a multi-year "disengagement" between the two super powers, particularly on the trade front. This, combined with other macro drags, including Renminbi volatility and economic slowdown in China, means that earnings expectations will inevitably face some pressure. On the other hand, valuations of the market have come off significantly - since the January peak, MSCI China has seen a 24% contraction in price-to-earnings valuations.

 

In such an environment, we expect to see more policy stimulus from China, including both fiscal and monetary measures, to help offset most of the growth impact of tariffs. A recent cut in personal income taxes and select import tariffs should also help support domestic consumption in a time of uncertainty. The Fund's portfolio strategy, therefore, focuses primarily on domestic secular trends such as consumption upgrade, infrastructure spending and manufacturing upgrade. We have been taking profits from macro sensitive areas including banks as well as stocks with earnings downgrade potential, such as select technology companies.

 

In Brief  
Fund Data  
Description Seeks to achieve long-term capital appreciation through investments in China companies.
Listing Date (NYSE) July 10, 1992
Total Fund Assets (millions) $339.1
Median Market Cap (in billions) $12.9
Distribution Frequency Annual
Management Firm Allianz Global Investors U.S. LLC
Portfolio Management Christina Chung, CFA, CMA Lead Portfolio Manager

 

Performance (US$ Returns)

(as of 9/30/2018)

 

 

  Fund Benchmark1
One Month -0.19% -0.79%
Three Month -5.77% -3.15%
One Year -0.47% 1.52%
Three Year 10.11% 14.62%

 

Net Asset Value / Market Price  
Net Asset Value (NAV) / Market Price at Inception $13.15 / $14.26
NAV / Market Price (as of 9/30/2018) $21.56 / $19.60

 

High / Low Ranges (52-Week)
High / Low NAV $26.38 / $20.29
High / Low Market Price $24.70 / $18.71
Premium/Discount to NAV (as of 9/30/2018) -9.09%

 

Fund Data (Common Shares)
Shares Outstanding 15,722,675
Average Daily Volume 24,724
Expense Ratio 1.49%

 

Fund Manager

 

 

 

Christina Chung,

CFA, CMA

Lead Portfolio Manager

 

1.MSCI Golden Dragon Index.

 

Investment Products: NOT FDIC INSURED | MAY LOSE VALUE | NOT BANK GUARANTEED

 

1 

 

Monthly Insights | As of 9/30/2018 | The China Fund, Inc.

 

Investment Objective

The investment objective of The China Fund, Inc. (the "Fund") is to achieve long-term capital appreciation. The Fund seeks to achieve its objective through investment in the equity securities of companies and other entities with significant assets, investments, production activities, trading or other business interests in China or which derive a significant part of their revenue from China.

 

The Fund has an operating policy that the Fund will invest at least 80% of its assets in China companies. For this purpose, 'China companies' are (i) companies for which the principal securities trading market is in China; (ii) companies for which the principal securities trading market is outside of China or in companies organized outside of China, that in both cases derive at least 50% of their revenues from goods or services sold or produced, or have at least 50% of their assets in China; or (iii) companies organized in China. Under the policy, China means the People's Republic of China, including Hong Kong, and Taiwan. The Fund will provide its stockholders with at least 60 days' prior notice of any change to this policy.

 

Returns For Periods Ended September 30, 2018*          
  1 Month 3 Month YTD 1 Year 3 Year 5 Year 10 Year Inception
NAV -0.19% -5.77% -7.98% -0.47% 10.11% 7.03% 9.33% 10.10%
Market Price -1.21% -6.22% -9.47% -1.29% 12.53% 7.79% 8.79% 9.36%
MSCI Golden Dragon Index -0.79% -3.15% -4.77% 1.52% 14.62% 8.64% 9.48%

 

Calendar Year Returns                
  2010 2011 2012 2013 2014 2015 2016 2017
NAV 27.26% -24.37% 12.12% 18.31% 7.82% -5.51% 0.60% 37.92%
Market Price 23.60% -27.51% 20.52% 12.70% 5.29% -6.38% -0.47% 47.41%
MSCI Golden Dragon Index 13.60% -18.35% 22.65% 7.25% 8.06% -7.12% 5.75% 44.19%

 

Past performance is not a guide to future returns.

*Annualized for periods greater than one year.

 

Source: State Street Bank and Trust Company. Source for index data: MSCI as at September 30, 2018. Investment returns are historical and do not guarantee future results. Investment returns reflect changes in net asset value and market price per share during each period and assumes that dividends and capital gains distributions, if any, were reinvested. The net asset value (NAV) percentages are not an indication of the performance of a shareholder's investment in the Fund, which is based on market price. NAV performance includes the deduction of management fees and other expenses. Market price performance does not include the deduction of brokerage commissions and other expenses of trading shares and would be lower had such commissions and expenses been deducted. It is not possible to invest directly in an index.

 

Premium/Discount

 

 

Sector Allocation    
  Fund Benchmark1
Financials 23.52% 23.79%
Information Technology 17.23% 15.71%
Consumer Discretionary 12.10% 14.48%
Communication Services 8.76% 16.85%
Industrials 7.53% 5.93%
Energy 6.94% 3.74%
Real Estate 6.48% 7.76%
Consumer Staples 5.54% 2.61%
Utilities 4.02% 3.59%
Health Care 1.53% 1.95%
Materials 1.18% 3.58%
Other assets & liabilities 5.16% 0.00%

 

Source: IDS GmbH - Analysis and Reporting Services, a subsidiary of Allianz SE.

 

Country Allocation    
  Fund Benchmark1
China 77.87% 76.86%
Hong Kong Red Chips 16.93% 8.86%
Hong Kong 'H' shares 23.00% 18.97%
Equity linked securities ('A' shares) 0.00% 0.00%
China 'A' & 'B' shares 2.76% 1.49%
Other Hong Kong securities 35.18% 32.26%
Others 0.00% 15.28%
Taiwan 16.98% 23.14%
Other assets & liabilities 5.15% 0.00%

 

Top 10 Holdings  
TAIWAN SEMIC CO LTD (Taiwan) 8.96%
CHINA CONSTRUCTION BANK CORP (China) 5.65%
TENCENT HOLDINGS LTD (China) 5.54%
AIA GROUP LTD (H.K.) 4.51%
PETROCHINA CO LTD (China) 4.07%
ALIBABA GROUP HOLDING LTD (China) 3.95%
PING AN INSURANCE (China) 3.70%
CHINA EVERBRIGHT INTL (China) 3.01%
HK EXCHANGES & CLEARING LTD (H.K.) 2.92%
SUN HUNG KAI PROPERTIES LTD (H.K.) 2.47%

 

Portfolio Characteristics  
  Fund Benchmark1
P/E Ratio 12.90 13.16
P/B Ratio 1.47 1.55
Issues in Portfolio 48 597
Foreign Holdings (%) 94.84 100.00
Other assets & liabilities (%) 5.16 0.00
Yield (%) 2.49 2.75

 

Source: IDS GmbH - Analysis and Reporting Services, a subsidiary of Allianz SE.

 

1.MSCI Golden Dragon Index.

 

Investment Products: NOT FDIC INSURED | MAY LOSE VALUE | NOT BANK GUARANTEED

 

2 

 

Monthly Insights | As of 9/30/2018 | The China Fund, Inc.

 

Distribution History (10 Year)

Declaration Date

Ex-dividend Date

Record Date

Payable Date

Distribution/

Share

Income

Long-term

Capital Gain

Short-term

Capital Gain

12/8/2008 12/22/2008 12/24/2008 1/23/2009 $5.81740 $0.48130 $5.33610
12/9/2009 12/22/2009 12/24/2009 12/29/2009 $0.25570 $0.25570
12/8/2010 12/21/2010 12/24/2010 12/29/2010 $2.27420 $0.37460 $1.89960
12/8/2011 12/21/2011 12/23/2011 12/29/2011 $2.99640 $0.17420 $2.82220
12/10/2012 12/20/2012 12/24/2012 12/28/2012 $3.25170 $0.34730 $2.90440
12/13/2013 12/19/2013 12/23/2013 12/27/2013 $3.31400 $0.43870 $2.87530
12/8/2014 12/18/2014 12/22/2014 1/5/2015 $3.76510 $0.29820 $3.46690
12/16/2015 12/23/2015 12/28/2015 1/6/2016 $1.49580 $0.21330 $0.84620 $0.43630
12/9/2016 12/19/2016 12/21/2016 1/5/2017 $0.46780 $0.46780
12/8/2017 12/18/2017 12/19/2017 1/4/2018 $0.54930 $0.54930

 

Distribution/Share includes Income, Long-term Capital gains and Short-term Capital gains.

 

The China Fund NAV Performance of $10,000 since inception

 

 

 

Past performance is not a guide to future returns.

 

Index Description

 

MSCI Golden Dragon Index

 

The MSCI Golden Dragon Index captures the equity market performance of large and mid cap China securities (H shares, B shares, Red-Chips and P-Chips) and non-domestic China securities listed in Hong Kong and Taiwan.

 

It is not possible to invest directly in an index.

 

Investment Products: NOT FDIC INSURED | MAY LOSE VALUE | NOT BANK GUARANTEED

 

3 

 

Monthly Insights | As of 9/30/2018 | The China Fund, Inc.

 

Portfolio in Full          
Sector Company (exchange ticker) Market Price Holding Value US$

% of

net assets

Financials         23.51
CHINA CONSTRUCTION BANK CORP 939 6.84 21,935,000 19,171,036 5.65
AIA GROUP LTD 1299 69.90 1,710,800 15,280,172 4.51
PING AN INSURANCE GROUP CO OF CHINA LTD 2318 79.50 1,235,000 12,545,441 3.70
HONG KONG EXCHANGES & CLEARING LTD 388 224.00 346,200 9,908,934 2.92
CHINA MERCHANTS BANK CO LTD 3968 31.80 1,870,500 7,600,404 2.24
BOC HONG KONG HOLDINGS LTD 2388 37.20 1,471,500 6,994,474 2.06
FUBON FINANCIAL HOLDING CO LTD 2881 51.80 2,805,000 4,758,753 1.40
CATHAY FINANCIAL HOLDING CO LTD 2882 52.50 2,030,000 3,490,486 1.03
Information Technology         17.23
TAIWAN SEMICONDUCTOR MANUFACTURING CO LTD 2330 262.50 3,536,000 30,399,895 8.96
HON HAI PRECISION INDUSTRY CO LTD 2317 79.20 2,871,000 7,447,129 2.20
MEDIATEK INC 2454 246.50 669,000 5,400,992 1.59
DIGITAL CHINA HOLDINGS LTD 861 4.19 9,305,000 4,981,753 1.47
FOCUS MEDIA INFORMATION TE A 002027 8.51 2,760,666 3,414,421 1.01
ASM PACIFIC TECHNOLOGY LTD 522 79.70 309,400 3,150,870 0.93
GLOBALWAFERS CO LTD 6488 336.50 213,000 2,347,444 0.69
GOLDPAC GROUP LTD 3315 2.04 4,970,000 1,295,503 0.38
Consumer Discretionary         12.09
ALIBABA GROUP HOLDING LTD BABA 164.76 81,351 13,403,391 3.95
GALAXY ENTERTAINMENT GROUP LTD 27 49.65 1,024,000 6,496,374 1.92
SHANGRI-LA ASIA LTD 69 11.64 3,110,000 4,625,569 1.36
QINGLING MOTORS CO LTD 1122 2.15 14,816,000 4,070,252 1.20
MGM CHINA HOLDINGS LTD 2282 12.40 2,305,200 3,652,432 1.08
CTRIP.COM INTERNATIONAL LTD CTRP 37.17 84,376 3,136,256 0.92
BRILLIANCE CHINA AUTOMOTIVE HOLDINGS LTD 1114 12.66 1,884,000 3,047,659 0.90
NEW ORIENTAL EDUCATION & TECHNOLOGY GROUP EDU 74.01 34,958 2,587,242 0.76
Communication Services         8.77
TENCENT HOLDINGS LTD 700 323.20 454,700 18,777,948 5.54
CHINA UNICOM HONG KONG LTD 762 9.22 3,660,000 4,311,852 1.27
CHINA MOBILE LTD 941 77.15 356,500 3,514,369 1.04
BAIDU INC BIDU 228.68 13,605 3,111,191 0.92
Industrials         7.53
CHINA EVERBRIGHT INTERNATIONAL LTD 257 6.76 11,811,221 10,202,188 3.01
CN STATE CONSTRUCTION INTERNATIONAL HOLDINGS LTD 3311 8.27 6,912,000 7,304,005 2.15
QINGDAO PORT INTERNATIONAL CO LTD 6198 5.56 6,077,000 4,317,336 1.27
KING SLIDE WORKS CO LTD 2059 401.00 185,000 2,429,666 0.72
AIRTAC INTERNATIONAL GROUP 1590 299.00 133,000 1,302,427 0.38
Energy         6.94
PETROCHINA CO LTD 857 6.34 17,048,000 13,810,663 4.07
CHINA OILFIELD SERVICES LTD 2883 8.49 4,770,000 5,174,613 1.53
CHINA PETROLEUM & CHEMICAL CORP 386 7.84 4,552,000 4,560,056 1.34
Real Estate         6.48
SUN HUNG KAI PROPERTIES LTD 16 114.00 576,000 8,390,332 2.47
SWIRE PACIFIC LTD 19 85.75 523,000 5,730,436 1.69
CHINA OVERSEAS LAND & INVESTMENT LTD 688 24.50 1,622,000 5,077,720 1.50
COUNTRY GARDEN HOLDINGS CO LTD 2007 9.87 2,208,000 2,784,634 0.82
Consumer Staples         5.55
ANGEL YEAST CO LTD A 600298 29.49 1,384,200 5,932,631 1.75
CHINA MENGNIU DAIRY CO LTD 2319 26.05 1,627,000 5,415,607 1.60
WH GROUP LTD 288 5.51 5,726,000 4,031,390 1.19
VINDA INTERNATIONAL HOLDINGS LTD 3331 13.50 1,984,000 3,422,372 1.01
Utilities         4.02
BEIJING ENTERPRISES HOLDINGS LTD 392 43.90 1,229,000 6,893,952 2.03
CHINA LONGYUAN POWER GROUP CORP LTD 916 6.58 8,023,000 6,745,506 1.99

 

Investment Products: NOT FDIC INSURED | MAY LOSE VALUE | NOT BANK GUARANTEED

 

4 

 

Monthly Insights | As of 9/30/2018 | The China Fund, Inc.

 

Sector Company (exchange ticker) Market Price Holding Value US$ % of net assets
Health Care         1.53
CSPC PHARMACEUTICAL GROUP LTD 1093 16.62 2,436,000 5,173,210 1.53
Materials         1.17
TIANGONG INTERNATIONAL CO LTD 826 1.73 17,970,000 3,972,336 1.17

 

Source: State Street Bank and Trust Company, IDS GmbH - Analysis and Reporting Services, a subsidiary of Allianz SE.

 

Important Information:

 

Holdings are subject to change daily. The Fund seeks to achieve its objective through investment in the equity securities of companies and other entities with significant assets, investments, production activities, trading or other business interests in China or which derive a significant part of their revenue from China. Investing in non-U.S. securities entails additional risks, including political and economic risk and the risk of currency fluctuations, as well as lower liquidity. These risks, which can result in greater price volatility, will generally be enhanced in less diversified funds that concentrate investments in a particular geographic region.

 

The information contained herein has been obtained from sources believed to be reliable but Allianz Global Investors U.S. LLC and its affiliates do not warrant the information to be accurate, complete or reliable. The opinions expressed herein are subject to change at any time and without notice. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. Investors should consider the investment objectives, risks, charges and expenses of any mutual fund carefully before investing. This and other information is contained in the Fund's annual and semiannual reports, proxy statement and other Fund information, which may be obtained by contacting your financial advisor or visiting the Fund's website at Investment Products: NOT FDIC INSURED | MAY LOSE VALUE | NOT BANK GUARANTEED. This information is unaudited and is intended for informational purposes only. It is presented only to provide information on the Fund's holdings, performance and strategies. The Fund is a closed-end exchange traded management investment company. This material is presented only to provide information and is not intended for trading purposes. Closed-end funds, unlike open-end funds, are not continuously offered. After the initial public offering by a closed-end fund, its shares can be purchased and sold on the open market through a stock exchange, where shares may trade at a premium or a discount. The market price of holdings is subject to change daily.

 

P/E is a ratio of security price to earnings per share. Typically, an undervalued security is characterized by a low P/E ratio, while an overvalued security is characterized by a high P/E ratio. P/B is a ratio of the current stock price to the book value. This is used to identify undervalued stocks. Dividend yield is the annual percentage of return earned by an investor on a common or preferred stock. The average dividend yield is the dividend rate divided by current share price.

 

©2018 Allianz Global Investors Distributors LLC, 1633 Broadway, New York, NY FS-CHN-0918

 

Investment Products: NOT FDIC INSURED | MAY LOSE VALUE | NOT BANK GUARANTEED