N-CSRS 1 dncsrs.htm MATTHEWS INTERNATIONAL FUNDS Matthews International Funds

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM N-CSR

 

CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT

INVESTMENT COMPANIES

 

 

Investment Company Act file number

    811-08510

 

 

 

 

 

 

 

Matthews International Funds

(Exact name of registrant as specified in charter)

 

Four Embarcadero Center, Suite 550

San Francisco, CA

   94111
(Address of principal executive offices)   (Zip code)

 

 

Mark W. Headley, President

Four Embarcadero Center, Suite 550

San Francisco, CA 94111

(Name and address of agent for service)

 

Registrant’s telephone number, including area code: 415-788-6036

 

Date of fiscal year end: December 31

 

Date of reporting period: June 30, 2007

 

Form N-CSR is to be used by management investment companies to file reports with the Commission not later than 10 days after the transmission to stockholders of any report that is required to be transmitted to stockholders under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may use the information provided on Form N-CSR in its regulatory, disclosure review, inspection, and policymaking roles.

A registrant is required to disclose the information specified by Form N-CSR, and the Commission will make this information public. A registrant is not required to respond to the collection of information contained in Form N-CSR unless the Form displays a currently valid Office of Management and Budget (“OMB”) control number. Please direct comments concerning the accuracy of the information collection burden estimate and any suggestions for reducing the burden to Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. § 3507.

Item 1. Reports to Stockholders.

The Report to Shareholders is attached herewith.

LOGO

 

LOGO

 

  

The views and opinions in this report were current as of June 30, 2007. They are not guarantees of performance or investment results and should not be taken as investment advice. Investment decisions reflect a variety of factors, and the managers reserve the right to change their views about individual stocks, sectors, and the markets at any time. As a result, the views expressed should not be relied upon as a forecast of the Funds’ future investment intent.

 

Statements of fact are from sources considered reliable, but neither the Funds nor the Investment Advisor makes any representation or guarantee as to their completeness or accuracy.

C O N T E N T S    Message to Shareholders    2
   Redemption Fee Policy and Investor Disclosure    5
   Manager Commentaries, Fund Characteristics and Schedules of Investments:   
  

Matthews Asia Pacific Fund

    6
  

Matthews Asia Pacific Equity Income Fund

    12
  

Matthews Pacific Tiger Fund

    18
  

Matthews Asian Growth and Income Fund

    24
  

Matthews Asian Technology Fund

    32
  

Matthews China Fund

    38
  

Matthews India Fund

    46
  

Matthews Japan Fund

    52
  

Matthews Korea Fund

    58
   Disclosure of Fund Expenses    64
   Statements of Assets and Liabilities    66
   Statements of Operations    68
   Statements of Changes in Net Assets    70
   Financial Highlights    75
   Notes to Financial Statements    84

MESSAGE TO SHAREHOLDERS

FROM THE INVESTMENT ADVISOR

Dear Fellow Shareholders,

We are very pleased to be able to report that for most Asian financial markets (Japan was the major exception) the second quarter and first half of 2007 saw substantial absolute gains. While both periods were punctuated by occasional sharp corrections, particularly for domestic Chinese equities, the most recent calendar quarter generally provided solid returns for regional investors. The major differentiator of performance for regional funds during both periods was relative exposure to the Japanese equity market. Among the Matthews Asian Funds the best performer for the second quarter and year-to-date was the Matthews China Fund, while the worst was the Matthews Japan Fund.

During the quarter ended June 30, the continued relatively strong performance of China and India led the regional markets. Notably, some other markets that lagged in prior periods, such as South Korea, had a strong second quarter. Asian markets outside Japan have seen generally positive returns in recent years helped by relatively strong regional growth—led again by China and India—without as many of the sudden financial shocks that have characterized the region in prior periods. The rapid development of the Chinese and Indian financial markets has dramatically changed the character and composition of regional markets, with Japan’s role declining consistently over the last ten years. This change is most dramatically seen in the composition of regional benchmarks, such as the MSCI All Country Asia Pacific Index. As recently as 1997, this benchmark had a 61% weighting to Japan, while today that weighting is only 51%. On the other hand, China and India combined now represent almost 10% of the index, versus 4% ten years ago. The current composition of many benchmarks remains constrained by the lack of convertibility of the Chinese currency, the renminbi (RMB). This means that for most investors, the close to U.S. $2 trillion in Chinese equities traded exclusively on local exchanges is not available for investment by international investors, and is generally not included in the regional benchmarks. Similarly, while India’s currency markets are more open, still many artificial barriers prevent the free flow of capital into and out of that country. Other regional markets also practice some forms of capital controls or attempt to manage local currency exchange rates, and many still impose limits on foreign ownership of some stocks and sectors. When all of these factors are taken into account, it is clear the region is likely only part way through a multi-year evolution that will continue to transform its financial markets in general, and the benchmarks of stock market performance in particular.

 

2    MATTHEWS ASIAN FUNDS

June 30, 2007

 

The lack of convertibility of the RMB is the major reason that the sudden corrections in the local Chinese equity markets—so widely reported in the Western financial press during February and June—did not have a greater impact on markets elsewhere in Asia. While the currency is closed on the capital account, the number of indirect ways in which investors can effectively gain exposure to the local currency, or conversely hedge their local currency exposure if they are locals, has increased substantially in recent years. This has increased the risk that a sudden change in the perceived value of the Chinese currency could have a ripple effect elsewhere, but for the most part China’s local markets remain somewhat insulated from outside influence. The continued transition from a closed capital market structure to one that is fully open remains probably the single greatest challenge facing China’s economic planners, but the continued success of the Chinese banks in raising capital has elevated expectations for success. While full currency convertibility for most Asian countries will eventually allow markets to more efficiently value local equities, the intervening period is likely to include more volatility as this evolutionary process unfolds.

The relative decline of Japan’s weighting in the region may not be over, but we believe that valuations across the region are no longer so obviously imbalanced and that regional integration at the corporate level is a major ongoing trend. While Japan may not currently be growing as fast as China and India, it is still the most successful economy in Asia and offers many benefits for investors that are not yet enjoyed in some less developed markets.

At Matthews Asian Funds, we have worked hard to be good stewards for our shareholders. As such, we are encouraged that Morningstar reports its Stewardship Grades. These grades go beyond a typical review of strategy, risk and return, and offer shareholders another way to evaluate fund companies, their portfolio managers and board of trustees. These ratings evaluate the extent to which a firm is aligning its interests with those of its shareholders.

Morningstar currently provides Stewardship Grades for six of the nine Matthews Asian Funds. As your investment partner, we are delighted to report that these six funds all received an A—Morningstar’s highest Stewardship Grade. In addition, each fund earned a rating of “Excellent” in at least four out of five categories. On the following page is a breakdown by category.

 

continued on page 4

800.789.ASIA [2742] www.matthewsfunds.com    3

MESSAGE TO SHAREHOLDERS

continued from page 3

 

MORNINGSTAR STEWARDSHIP GRADESSMAS OF
JUNE 30, 2007

    OVERALL
GRADE		    CORPORATE
CULTURE		    BOARD
QUALITY		    MANAGER
INCENTIVES		    FEES    REGULATORY
ISSUES

Matthews Asia Pacific Fund

    A    Excellent    Excellent    Excellent    Good    Excellent

Matthews Pacific Tiger Fund

    A    Excellent    Excellent    Excellent    Good    Excellent

Matthews Asian Growth and Income Fund

    A    Excellent    Excellent    Excellent    Excellent    Excellent

Matthews China Fund

    A    Excellent    Excellent    Good    Excellent    Excellent

Matthews Japan Fund

    A    Excellent    Excellent    Excellent    Good    Excellent

Matthews Korea Fund

    A    Excellent    Excellent    Excellent    Good    Excellent

On a related note, we are pleased to announce that Jon Zeschin was appointed to the Matthews Asian Funds Board of Trustees in May 2007. Mr. Zeschin is the President and Founder of Essential Advisers and has more than 25 years of experience in the investment management business, encompassing virtually all aspects of managing investments for clients. Mr. Zeschin’s extensive industry experience will complement the strength of Matthews’ diverse board membership and his insights will serve our shareholders well.

As always, thank you for your investment in the Matthews Asian Funds.

 

LOGO

   LOGO
G. Paul Matthews   Mark W. Headley

Chairman and Chief Investment Officer

   Chief Executive Officer and Portfolio Manager
Matthews International Capital Management, LLC   Matthews International Capital Management, LLC

The Stewardship Grade is determined using some quantitative measures, but is primarily based on qualitative information gathered by Morningstar fund analysts. Each fund is assigned a letter grade from A (best) to F (worst). All funds are graded on an absolute basis. Morningstar analysts’ evaluation of the following five components determines the grade for each fund: Regulatory Issues, Board Quality, Manager Incentives, Fees and Corporate Culture. Each component is worth a maximum of 2 points, for a total, overall score of 10 possible points. Points for each component are awarded in increments as small as 0.5. With the exception of Regulatory Issues, the minimum score a fund can receive in each component is zero. For Regulatory Issues, the lowest possible score is –2. Each component score corresponds to one of the following qualitative terms: Excellent = 2 points; Good = 1.5 points; Fair = 1 point; Poor = 0.5 points; Very Poor = 0 points or fewer. The overall Stewardship Grade is based on the sum of the five component scores: A: 9 - 10 points; B: 7 - 8.5 points; C: 5 - 6.5 points; D: 3 - 4.5 points; F: 2.5 points or fewer.

© 2007 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information.

4    MATTHEWS ASIAN FUNDS

JUNE 30, 2007

 

REDEMPTION FEE POLICY

The Funds assess a redemption fee of 2.00% of the total redemption proceeds if you sell or exchange your shares within 90 calendar days after purchasing them. The redemption fee is paid directly to the Funds and is designed to discourage frequent short-term trading and to offset transaction costs associated with such trading of Fund shares. For purposes of determining whether the redemption fee applies, the shares that have been held longest will be redeemed first. The redemption fee does not apply to redemptions of shares held in certain omnibus accounts and retirement plans that cannot currently implement the redemption fee. While these exceptions exist, the Funds are not accepting any new accounts that cannot implement the redemption fee or provide adequate alternative controls. For more information on this policy, please see the Funds’ prospectus.

INVESTOR DISCLOSURE

Past Performance: All performance quoted in this report is past performance and is no guarantee of future results. Investment return and principal value will fluctuate with changing market conditions so that when redeemed, shares may be worth more or less than their original cost. Current performance may be lower or higher than the returns quoted. Returns are net of the Funds’ management fee and other operating expenses. If certain of the Funds’ fees and expenses had not been waived, returns would have been lower. For the Funds’ most recent month-end performance, please call 1-800-789-ASIA [2742] or visit www.matthewsfunds.com.

Investment Risk: Mutual fund shares are not deposits or obligations of, or guaranteed by, any depositary institution. Shares are not insured by the FDIC, Federal Reserve Board or any government agency and are subject to investment risks, including possible loss of principal amount invested. Investing in international markets may involve additional risks, such as social and political instability, market illiquidity, exchange-rate fluctuations, a high level of volatility and limited regulation. In addition, single-country and sector funds may be subject to a higher degree of market risk than diversified funds because of concentration in a specific industry, sector or geographic location. Please see the Funds’ prospectus and Statement of Additional Information for more risk disclosure.

Fund Holdings: The portfolios shown in this report should not be relied upon as complete listings of the Funds’ holdings, as information on particular holdings may have been withheld if it was in the Funds’ interest to do so. Holdings are subject to change at any time, so holdings shown in this report may not reflect current Fund holdings. The Funds file complete schedules of portfolio holdings with the Securities and Exchange Commission (the “SEC”) for the first and third quarters of each fiscal year on Form N-Q. The Funds’ Form N-Q is filed with the SEC within 60 days of the end the quarter to which it relates, and is available on the SEC’s website at www.sec.gov. It may also be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 800-SEC-0330.

Proxy Voting Record: The Funds’ Statement of Additional Information containing a description of the policies and procedures that the Matthews Asian Funds use to vote proxies relating to portfolio securities, along with each Fund’s proxy voting record relating to portfolio securities held during the 12-month period ended June 30, 2007, is available upon request, at no charge, at the Funds’ website at www.matthewsfunds.com or by calling 1-800-789-ASIA [2742], or on the SEC’s website at www.sec.gov.

This report has been prepared for Matthews Asian Funds shareholders. It is not authorized for distribution to prospective investors unless accompanied or preceded by a current Matthews Asian Funds prospectus, which contains more complete information about the Funds’ investment objectives, risks and expenses. You should read the prospectus carefully before investing. Additional copies of the prospectus may be obtained by calling 800-789-ASIA [2742] or by visiting www.matthewsfunds.com. Please read the prospectus carefully before you invest or send money, as it explains the risks associated with investing in international markets. These include risks related to social and political instability, market illiquidity and currency volatility.

The Matthews Asian Funds are distributed by PFPC Distributors, Inc., 760 Moore Road, King of Prussia, PA 19406.

800.789.ASIA [2742] www.matthewsfunds.com    5

MATTHEWS ASIA PACIFIC FUND

 

FUND DESCRIPTION

    SYMBOL: MPACX

 

Under normal market conditions, the Matthews Asia Pacific Fund seeks to achieve its investment objective by investing at least 80% of its total net assets, which include borrowings for investment purposes, in the common and preferred stocks of companies located in the Asia Pacific region. The Asia Pacific region includes Australia, China, Hong Kong, India, Indonesia, Japan, Malaysia, New Zealand, Pakistan, Philippines, Singapore, South Korea, Taiwan, Thailand and Vietnam. The Fund may also invest in the convertible securities, of any duration or quality, of Asia Pacific companies.

PORTFOLIO MANAGES

Lead Manager: Mark W. Headley

Co-Managers: Richard H. Gao, Taizo Ishida and Sharat Shroff, CFA

PORTFOLIO MANAGER COMMENTARY

The Matthews Asia Pacific Fund gained 7.63% in the first half of 2007 while its benchmark, the MSCI All Country Asia Pacific Index gained 9.95%. The Lipper Pacific Region Funds Category Average returned 12.58% for the same period. The year began on a volatile note with considerable variation in performance across the different markets. However, barring a momentary blip in the mainland Chinese stock market and the sideways trend in Japan, the region experienced a period of steady gains in the second quarter, overcoming record levels of equity issuance. The portfolio gained some ground in the second quarter, helped by a rally in financials, but trailed its benchmark on a year-to-date basis due to limited exposure to commodities and industrials.

The lackluster performance of the Japanese markets continued to be a drag on the Fund’s absolute performance. In spite of the fourth consecutive year of profit growth in corporate Japan, investor skepticism on the pace of recovery remains high. That said, we believe there are attractive opportunities, and our firm conviction in the long-term potential of individual Japanese companies led us to increase our exposure to the market during the period. Such a contrarian action during a period where all eyes are on the developing Asian markets has been painful, but is consistent with our long-term search for an appropriate balance between growth and value.

Some of the Fund’s holdings in the Chinese financial sector were the biggest contributors to performance; these companies benefited from aggressive buying by investors on the domestic “A share” markets in Shanghai and Shenzhen (note: the Fund has no positions in

 

continued on page 8

 

6    MATTHEWS ASIAN FUNDS

ALL DATA IS AS OF JUNE 30, 2007, UNLESS OTHERWISE NOTED

 

PERFORMANCE AS OF JUNE 30, 2007

 

                        Average Annual Total Returns  

Fund Inception: 10/31/03

    3 MO     YTD     1 YR     3 YRS     SINCE
INCEPTION		  

Matthews Asia Pacific Fund

    8.85 %   7.63 %   22.79 %   19.89 %   19.06 %

MSCI All Country Asia Pacific Index 1

   6.13 %   9.95 %   22.98 %   21.11 %   20.35 %

Lipper Pacific Region Funds Category Average 2

   8.00 %   12.58 %   28.35 %   24.15 %   22.29 %

All performance quoted is past performance and is no guarantee of future results. Assumes reinvestment of all dividends and/or distributions. Unusually high returns may not be sustainable. Investment return and principal value will fluctuate with changing market conditions so that shares, when redeemed, may be worth more or less than their original cost. The performance of foreign indices may be based on different exchange rates than those used by the Fund and, unlike the Fund’s NAV, is not adjusted to reflect fair value at the close of the NYSE. Current performance may be lower or higher than the return figures quoted. Returns are net of the Funds’ management fee and other operating expenses. Returns would have been lower if certain of the Funds’ fees and expenses had not been waived. For the Funds’ most recent month-end performance please call 800-789-ASIA [2742] or visit www.matthewsfunds.com.

LOGO

OPERATING EXPENSES3

 

Net Ratio: 6 months ended 6/30/07 (annualized) 4,5

    1.18 %

Net Ratio: Fiscal Year 2006 5

    1.24 %

Gross Ratio: Fiscal Year 2006

    1.26 %

PORTFOLIO TURNOVER6

 

6 months ended 6/30/07 (annualized) 4

   58.03 %

Fiscal Year 2006

    40.45 %

1

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, Pakistan, Philippines, Singapore, South Korea, Taiwan and Thailand. It is not possible to invest directly in an index. Source: Index data from Morgan Stanley Capital International; total return calculations performed by PFPC Inc.

2

As of 6/30/07, the Lipper Pacific Region Funds Category Average consisted of 33 funds for the three-month and YTD periods, 28 funds for the one-year period, and 25 funds for the three-year period and since 10/31/03. Lipper, Inc. fund performance does not reflect sales charges and is based on total return, including reinvestment of dividends and capital gains, for the stated periods.

3

Matthews Asian Funds do not charge 12b-1 fees.

4

Unaudited.

5

Includes management fee, administration and shareholder services fees after reimbursement, waiver or recapture of expenses by Advisor. Voluntary fee waivers by the Advisor may be discontinued at any time.

6

The lesser of fiscal year-to-date long-term purchase costs or sales proceeds divided by the average monthly market value of long-term securities.

 

800.789.ASIA [2742] www.matthewsfunds.com    7

MATTHEWS ASIA PACIFIC FUND

 

TOP TEN HOLDINGS1

 

    

COUNTRY

    % OF NET ASSETS

Sony Corp.

    Japan    2.5%

Amorepacific Corp.

    South Korea    2.4%

Lenovo Group, Ltd.

    China/Hong Kong    2.3%

AXA Asia Pacific Holdings, Ltd.

    Australia    2.2%

Nintendo Co., Ltd.

    Japan    2.2%

Hana Financial Group, Inc.

    South Korea    2.1%

China Life Insurance Co., Ltd.

    China/Hong Kong    2.1%

Hanmi Pharmaceutical Co., Ltd.

    South Korea    2.1%

Pico Far East Holdings, Ltd.

    China/Hong Kong    2.0%

Advanced Info Service Public Co., Ltd.

    Thailand    1.9%

% OF ASSETS IN TOP 10

       21.8%

COUNTRY ALLOCATION

 

Japan

    42.9 %

China/Hong Kong

    20.7 %

South Korea

    14.2 %

India

    6.2 %

Thailand

    5.0 %

Singapore

    3.5 %

Taiwan

    2.8 %

Indonesia

    2.3 %

Australia

    2.2 %

Cash, cash equivalents and other

    0.2 %

SECTOR ALLOCATION

 

Financials

    34.0 %

Information Technology

    20.8 %

Consumer Discretionary

    19.8 %

Consumer Staples

    9.1 %

Health Care

    6.7 %

Telecommunication Services

    3.4 %

Industrials

    3.4 %

Materials

    2.6 %

Cash, cash equivalents and other

    0.2 %

MARKET CAP EXPOSURE

 

Large cap (over $5 billion)

    58.0 %

Mid cap ($1–$5 billion)

    28.5 %

Small cap (under $1 billion)

    13.3 %

Cash, cash equivalents and other

    0.2 %

 

NUMBER OF SECURITIES

    NAV    FUND ASSETS   

REDEMPTION FEE

    12B-1 FEES

73

    $ 18.21    $ 471.7 million    2.00% within 90 calendar days    None

1

Holdings may combine more than one security from same issuer.

PORTFOLIO MANAGER COMMENTARY continued from page 6

Chinese “A shares”). This enthusiasm spilled over to the Hong Kong markets where Chinese companies are available to international investors. This spillover effect is likely to remain a source of serious volatility. The Fund continues to participate in the growth of the Chinese economy through its investment in “H shares” listed in Hong Kong, and some exposure to “B shares” of higher quality mainland stocks, although we trimmed our exposure during the first half of the year.

By contrast, we modestly raised the Fund’s allocation to Korea, and in particular the financial services sector. The recent passage

 

8    MATTHEWS ASIAN FUNDS

ALL DATA IS AS OF JUNE 30, 2007, UNLESS OTHERWISE NOTED

 

of the Capital Market Consolidation Act (CMCA) is a significant development aimed at liberalizing Korea’s capital markets along two key dimensions. CMCA is likely to lead to greater innovation in product and service offerings, and jump start consolidation in Korea’s financial services landscape, making it more competitive globally. Separately, the Fund’s holdings in media and pharmaceuticals have staged a modest recovery, but continue to lag the overall market on concerns over the recently signed free-trade agreement between Korea and the U.S.

The portfolio has a relatively defensive tilt to India where the market is in its fourth year of strong gains. Inflation, as measured by Wholesale Price Index (WPI) based metrics, seems to have receded from its high base a year ago. This change was aided by a strengthening currency; however, demand trends remain robust and inflation may pick up in the second half of the year. Further, there seems to be an accelerating trend of cross-border acquisitions as Indian companies strive to build a broader platform for growth. Sun Pharmaceuticals is one of the companies that has demonstrated effective management capabilities in this regard. Relative to some of its industry peers, Sun’s management has successfully acquired struggling companies and turned them around. Keen understanding of the industry coupled with a solid price discipline have enabled Sun to generate profitability from these companies even in competitive markets like the U.S.

Ten years after the Asian financial crisis, corporate balance sheets are much healthier. Looking ahead, one of the key questions facing investors is the ability of the region to withstand a global slowdown. In that context, it is encouraging to see signs of greater integration within the Asia Pacific region: whether it is Indian companies hiring from Chinese universities, Chinese companies seeking to list on the Tokyo exchange, or Australian skiers buying condominiums in Hokkaido. Beyond just companies and consumers, even the governments have shown a willingness to cooperate more closely. In early May, finance ministers from the ASEAN+3 countries stitched together an initial agreement to pool their foreign reserves in an effort to bring greater stability to the currencies in the region. Over time, such efforts can become substantial drivers to sustaining growth and we continue to look for investment ideas that are beneficiaries of this long-term trend.

 

800.789.ASIA [2742] www.matthewsfunds.com    9

MATTHEWS ASIA PACIFIC FUND

 

SCHEDULE OF INVESTMENTS (UNAUDITED)

EQUITIES: 99.8%*

 

     SHARES    VALUE

JAPAN: 42.9%

      

Sony Corp. ADR

    227,800    $ 11,702,086

Nintendo Co., Ltd.

    27,800      10,182,985

The Sumitomo Trust & Banking Co., Ltd.

    907,000      8,655,634

Nitto Denko Corp.

    157,200      7,941,393

Sekisui House, Ltd.

    578,000      7,722,315

Daibiru Corp.

    551,700      7,662,189

Benesse Corp.

    258,700      7,500,987

Nomura Research Institute, Ltd.

    254,000      7,488,487

Sysmex Corp.

    198,500      7,335,431

Funai Zaisan Consultants Co., Ltd.

    1,232      7,224,398

Ichiyoshi Securities Co., Ltd.

    498,400      7,221,487

Toyota Motor Corp. ADR

    55,600      6,998,928

Hoya Corp.

    209,400      6,955,906

Sumitomo Realty & Development Co., Ltd.

    213,000      6,954,396

Ito En, Ltd.

    211,000      6,940,508

Point, Inc.

    111,470      6,618,036

Canon, Inc. ADR

    109,050      6,394,692

ORIX Corp.

    23,490      6,190,867

Takeda Pharmaceutical Co., Ltd.

    95,600      6,180,516

Mitsubishi Estate Co., Ltd.

    226,000      6,149,036

Unicharm Petcare Corp.

    149,000      6,014,457

Yahoo! Japan Corp.

    17,612      5,986,292

Nitori Co., Ltd.

    111,900      5,589,320

Mizuho Financial Group, Inc.

    794      5,500,767

Pigeon Corp.

    334,300      5,424,824

Keyence Corp.

    24,100      5,271,172

Monex Beans Holdings, Inc.

    5,700      4,768,325

Nidec Corp.

    79,500      4,674,761

The Chiba Bank, Ltd.

    519,000      4,611,460

Nippon Shokubai Co., Ltd.

    500,000      4,446,700
         

Total Japan

         202,308,355
         

CHINA/HONG KONG: 20.7%

      

Lenovo Group, Ltd.

    18,634,000      10,986,129

China Life Insurance Co., Ltd. H Shares

    2,771,000      9,958,193

Pico Far East Holdings, Ltd.

    29,774,000      9,519,516

China Merchants Bank Co., Ltd. H Shares

    2,721,500      8,283,674

Dah Sing Financial Holdings, Ltd.

    969,200      8,174,588

China Vanke Co., Ltd. B Shares

    3,752,514      7,769,746

China Mobile, Ltd. ADR

    135,300      7,292,670

Hang Lung Group, Ltd.

    1,553,000      7,011,063

The9, Ltd. ADR**

    145,900      6,749,334

Dairy Farm International Holdings, Ltd.

    1,256,400      5,678,928

Television Broadcasts, Ltd.

    788,000      5,542,766

Shangri-La Asia, Ltd.

    2,276,000      5,501,381

NetEase.com, Inc. ADR**

    301,000      5,123,020

Belle International Holdings, Ltd.**

    51,000      56,288

China High Speed Transmission Equipment Group Co., Ltd.**,***,****

    23,000      26,694
         

Total China/Hong Kong

         97,673,990
         

SOUTH KOREA: 14.2%

      

Amorepacific Corp.

    14,262      11,300,305

Hana Financial Group, Inc.

    205,120      10,002,334

Hanmi Pharmaceutical Co., Ltd.

    63,131      9,703,525

ON*Media Corp.**

    714,300      6,618,399

NHN Corp.**

    32,651      5,955,180

CDNetworks Co., Ltd.**

    231,427      5,648,838

Kiwoom.com Securities Co., Ltd.

    72,512      5,533,470

Hyundai Department Store Co., Ltd.

    45,970      5,423,748

Samsung Electronics Co., Ltd.

    5,465      3,348,152

Kookmin Bank ADR

    35,540      3,117,569

Kiwoom.com Securities Co., Ltd. Rights, expire 07/11/07***, ****

    14,509      207,307
         

Total South Korea

         66,858,827
         

 

10    MATTHEWS ASIAN FUNDS

JUNE 30, 2007

 

     SHARES    VALUE

INDIA: 6.2%

      

Sun Pharmaceutical Industries, Ltd.

    298,907    $ 7,530,503

Dabur India, Ltd.

    2,973,060      7,512,080

HDFC Bank, Ltd.

    260,636      7,342,693

Infosys Technologies, Ltd.

    125,678      5,956,004

Sun Pharma Advanced Research Co., Ltd.**,***,****

    298,907      986,345
         

Total India

         29,327,625
         

THAILAND: 5.0%

      

Advanced Info Service Public Co., Ltd.

    3,611,600      9,048,614

Bangkok Bank Public Co., Ltd.

    1,658,500      5,860,594

Land & Houses Public Co., Ltd.

    22,417,300      4,869,797

Major Cineplex Group Public Co., Ltd.

    7,285,400      4,051,548
         

Total Thailand

         23,830,553
         

SINGAPORE: 3.5%

      

DBS Group Holdings, Ltd.

    442,700      6,593,866

Fraser and Neave, Ltd.

    1,462,000      5,205,226

Hyflux, Ltd.

    2,476,812      4,740,852
         

Total Singapore

         16,539,944
         

TAIWAN: 2.8%

      

Taiwan Semiconductor Manufacturing Co., Ltd.

    3,392,999      7,319,529

Taiwan Secom Co., Ltd.

    3,579,160      6,098,490
         

Total Taiwan

         13,418,019
         

INDONESIA: 2.3%

      

PT Astra International

    3,000,500      5,612,446

Bank Rakyat Indonesia

    7,889,500      5,020,988
         

Total Indonesia

         10,633,434
         

AUSTRALIA: 2.2%

      

AXA Asia Pacific Holdings, Ltd.

    1,647,685      10,379,046
         

Total Australia

         10,379,046
         

TOTAL INVESTMENTS: 99.8%

(Cost $382,525,452*****)

         470,969,793

CASH AND OTHER ASSETS, LESS LIABILITIES: 0.2%

         718,394
         

NET ASSETS: 100.0%

       $ 471,688,187
         
* As a percentage of net assets as of June 30, 2007
** Non–income producing security
*** Fair valued under direction of the Board of Trustees
**** Illiquid security
***** Cost of investments is $382,525,452 and net unrealized appreciation consists of:

 

Gross unrealized appreciation

    $ 107,065,464  

Gross unrealized depreciation

      (18,621,123 )
        

Net unrealized appreciation

    $ 88,444,341  
        

 

ADR American Depositary Receipt

See accompanying notes to financial statements.

 

800.789.ASIA [2742] www.matthewsfunds.com    11

MATTHEWS ASIA PACIFIC EQUITY INCOME FUND

 

FUND DESCRIPTION

    SYMBOL: MAPIX

Under normal market conditions, the Matthews Asia Pacific Equity Income Fund seeks to achieve its investment objective by investing at least 80% of its total net assets, which include borrowings for investment purposes, in income-paying publicly traded common stocks, preferred stocks, convertible preferred stocks, and other equity-related instruments (including, for example, investment trusts and other financial instruments) of companies located in the Asia Pacific region, which includes Australia, China, Hong Kong, India, Indonesia, Japan, Malaysia, New Zealand, Pakistan, Philippines, Singapore, South Korea, Taiwan, Thailand and Vietnam.

PORTFOLIO MANAGERS

 

Lead Manager: Andrew T. Foster

   Co-Manager: Jesper Madsen, CFA

PORTFOLIO MANAGER COMMENTARY

The Matthews Asia Pacific Equity Income Fund returned 10.80% for the first six months of 2007. By comparison, its benchmark the MSCI All Country Asia Pacific Index, gained 9.95%. The Fund paid its inaugural semi-annual income distribution of 10.3 cents per share on June 26, as per its stated intention to distribute investment income twice per year.

Relative calm returned to the region’s markets in the second quarter after the sharp sell-off in late February, and most equity markets saw positive returns during the period. The notable exception was Japan. The broad TOPIX Index ended only 2.3% shy of its highest level since 1991, but returns from Japanese equities were weighed down by the 3.3% depreciation of the yen year-to-date. In fact, the yen was the only major Asian currency to lose value relative to the U.S. dollar during the first six months of the year. Japan has now experienced positive real economic growth in 19 consecutive quarters, but consumer price inflation has yet to definitively beat out deflation. This, coupled with political pressure on the Bank of Japan to refrain from hiking interest rates, heightened the uncertainty surrounding the outlook for interest rates.

Much like other markets around the world, Asia Pacific has seen the privatization of an increasing number of publicly listed companies, either through leveraged buyouts or private equity deals. This activity is in part fuelled by the low cost of borrowing relative to the cash flows generated by the targeted companies, enabling larger deals to take place. This is particularly true in industries that exhibit stable cash flows, such as telecommunication service providers. In fact, during the first half of the year the main contributor to Fund performance, Maxis Communications, was taken private by its largest shareholder.

 

continued on page 14

 

12    MATTHEWS ASIAN FUNDS

ALL DATA IS AS OF JUNE 30, 2007, UNLESS OTHERWISE NOTED

 

PERFORMANCE AS OF JUNE 30, 2007

 

Fund Inception: 10/31/06

    3 MO     YTD     SINCE INCEPTION1  

Matthews Asia Pacific Equity Income Fund

    8.19 %   10.80 %   19.56 %

MSCI All Country Asia Pacific Index 2

   6.13 %   9.95 %   17.06 %

All performance quoted is past performance and is no guarantee of future results. Assumes reinvestment of all dividends and/or distributions. Unusually high returns may not be sustainable. Investment return and principal value will fluctuate with changing market conditions so that shares, when redeemed, may be worth more or less than their original cost. The performance of foreign indices may be based on different exchange rates than those used by the Fund and, unlike the Fund’s NAV, is not adjusted to reflect fair value at the close of the NYSE. Current performance may be lower or higher than the return figures quoted. Returns are net of the Funds’ management fee and other operating expenses. Returns would have been lower if certain of the Funds’ fees and expenses had not been waived. For the Funds’ most recent month-end performance please call 800-789-ASIA [2742] or visit www.matthewsfunds.com.

OPERATING EXPENSES3

 

Net Ratio: 6 months ended 6/30/07 (annualized) 4,5

    1.47 %

Net Ratio: Fiscal Period 2006 (annualized) 5,7

   1.50 %

Gross Ratio: Fiscal Period 2006 (annualized) 7

   2.93 %

PORTFOLIO TURNOVER6

 

6 months ended 6/30/07 (annualized) 4

   19.12 %

Fiscal Period 2006 (annualized) 7

    0.00 %

TOP TEN HOLDINGS8

 

    

COUNTRY

    % OF NET ASSETS

Taiwan Semiconductor Manufacturing Co., Ltd.

    Taiwan    4.9%

HSBC Holdings PLC

    United Kingdom    4.6%

Lawson, Inc.

    Japan    3.1%

SK Telecom Co., Ltd.

    South Korea    2.8%

BOC Hong Kong Holdings, Ltd.

    China/Hong Kong    2.6%

Globe Telecom, Inc.

    Philippines    2.6%

Monex Beans Holdings, Inc.

    Japan    2.4%

Eisai Co., Ltd.

    Japan    2.4%

Public Bank BHD

    Malaysia    2.4%

Hana Finacial Group, Inc.

    South Korea    2.4%

% OF ASSETS IN TOP 10

       30.2%

1

Actual returns, not annualized.

2

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, Pakistan, Philippines, Singapore, South Korea, Taiwan and Thailand. The Matthews Asia Pacific Equity Income Fund invests in countries that are not included in the MSCI All Country Asia Pacific Index. It is not possible to invest directly in an index. Source: Index data from Morgan Stanley Capital International; total return calculations performed by PFPC Inc.

3

Matthews Asian Funds do not charge 12b-1 fees.

4

Unaudited.

5

Includes management fee, administration and shareholder services fees after reimbursement, waiver or recapture or expenses by Advisor. The Advisor has agreed to waive fees and reimburse expenses to the extent needed to limit total annual operating expenses until October 31, 2009. Voluntary fee waivers by the Advisor may be discontinued at any time.

6

The lesser of fiscal year-to-date long-term purchase costs or sales proceeds divided by the average monthly market value of long-term securities.

7

The Matthews Asia Pacific Equity Income Fund commenced operations on 10/31/06.

8

Holdings may combine more than one security from same issuer.

 

800.789.ASIA [2742] www.matthewsfunds.com    13

MATTHEWS ASIA PACIFIC EQUITY INCOME FUND

 

COUNTRY ALLOCATION

 

China/Hong Kong

    18.7 %

Japan

    17.8 %

Taiwan

    12.8 %

Malaysia

    9.1 %

Singapore

    7.1 %

Australia

    6.8 %

Thailand

    5.6 %

South Korea

    5.1 %

United Kingdom 1

    4.6 %

India

    4.1 %

Philippines

    2.5 %

Indonesia

    1.5 %

New Zealand

    1.5 %

Cash, cash equivalents and other2

    2.8 %

SECTOR ALLOCATION

 

Financials

    24.7 %

Consumer Discretionary

    17.3 %

Information Technology

    14.5 %

Telecommunication Services

    14.5 %

Consumer Staples

    6.8 %

Industrials

    5.8 %

Health Care

    5.6 %

Energy

    4.4 %

Utilities

    3.6 %

Cash, cash equivalents and other2

    2.8 %

MARKET CAP EXPOSURE

 

Large cap (over $5 billion)

    54.6 %

Mid cap ($1–$5 billion)

    28.6 %

Small cap (under $1 billion)

    14.0 %

Cash, cash equivalents and other2

    2.8 %

 

NUMBER OF SECURITIES2

    NAV    FUND ASSETS   

REDEMPTION FEE

    12B-1 FEES

54

    $11.83    $63.1 million    2.00% within 90 calendar days    None

1

The United Kingdom is not included in the MSCI All Country Asia Pacific Index.

2

Includes BNY Hamilton Money Fund.

PORTFOLIO MANAGER COMMENTARY continued from page 12

Maxis Communications is a leading Malaysian telecommunications provider with a strong position in Malaysia and a growing business in India. While the growth of new wireless subscribers in the Malaysian market was decelerating as mobile phone penetration rose, we believed the company could increasingly afford to pay higher dividends, and yet still invest in overseas expansion opportunities. We felt the market was discounting the company’s future growth prospects in Malaysia, as well as the likelihood of success in its Indian expansion. This resulted in both an attractive current dividend yield and good potential for dividend growth.

The Fund built its position in Maxis with the intention of holding shares over the long term. However, shareholders in Maxis Communications received a 20% takeover premium on top of the more than 30% price appreciation in the months leading up to the offer. We felt the company might be worth a great deal more to patient investors; yet as the vast majority of shareholders indicated a preference for a quick gain, we had little choice but to submit our shares in the tender so as to avoid seeing the Fund’s holdings in Maxis forcibly privatized.

While we are pleased to report that the Fund outperformed its benchmark during the first

 

14    MATTHEWS ASIAN FUNDS

ALL DATA IS AS OF JUNE 30, 2007, UNLESS OTHERWISE NOTED

 

half of 2007, there were sources of weakness in the portfolio during the period. For example, the Fund’s holdings in large banks were a drag on aggregate performance. The valuation of these banks are to some extent penalized for having a lower growth rate than their smaller peers and are often perceived as too large to be acquisition targets. Furthermore, investors have focused on the impact of rising subprime mortgage defaults, and their spillover effects on growth and interest rates in the U.S. Despite having liquid balance sheets, good (if underrated) growth prospects, strong dividend policies and very reasonable yields, the performance of Asia’s larger banks has generally lagged the markets, weighed down by this sort of global sentiment.

In addition, the Fund would have benefited from greater exposure to Korean equities during the first half of the year. The Korea Composite Stock Price Index gained 22.39% during the second quarter alone. However, even though Korean valuations measured via price to earnings multiples were some of the cheapest in Asia Pacific, this was not reflected in higher dividend yields. The reason is simple: On average, Korean companies pay out a smaller portion of their earnings as dividends to shareholders, relative to companies elsewhere in the region. To date, this has made it harder to justify having a more substantial exposure to Korea.

We continue to look for companies offering reasonably priced and growing dividends. This explains our ongoing exposure to Japanese companies, which we still believe offer good potential for dividend growth, as we discussed in the previous quarterly report. We are also maintaining substantial exposure to the region’s larger banks, across several geographies. We believe their underperformance thus far this year represents an opportunity, and their lower valuations may also prove more defensive if a downturn were to occur.

 

800.789.ASIA [2742] www.matthewsfunds.com    15

MATTHEWS ASIA PACIFIC EQUITY INCOME FUND

 

SCHEDULE OF INVESTMENTS (UNAUDITED)

EQUITIES: 97.2%*

 

     SHARES    VALUE

CHINA/HONG KONG: 18.7%

      

BOC Hong Kong Holdings, Ltd.

    692,000    $ 1,647,872

CLP Holdings, Ltd.

    195,500      1,311,384

Hang Seng Bank, Ltd.

    91,300      1,235,362

Café de Coral Holdings, Ltd.

    648,000      1,228,177

SA SA International Holdings, Ltd.

    3,156,000      1,162,431

ASM Pacific Technology, Ltd.

    142,000      1,028,788

VTech Holdings, Ltd.

    121,000      1,021,332

Huaneng Power International, Inc. H Shares

    836,000      949,417

PetroChina Co., Ltd. H Shares

    614,000      904,604

China Mobile, Ltd.

    65,500      703,234

PetroChina Co., Ltd. ADR

    4,200      624,456
         

Total China/Hong Kong

         11,817,057
         

JAPAN: 17.8%

      

Lawson, Inc.

    56,700      1,961,762

Monex Beans Holdings, Inc.

    1,834      1,534,229

Eisai Co., Ltd.

    34,700      1,516,231

The Sumitomo Trust & Banking Co., Ltd.

    154,000      1,469,645

Benesse Corp.

    41,800      1,211,988

Takeda Pharmaceutical Co., Ltd.

    17,200      1,111,976

Hisamitsu Pharmaceutical Co., Inc.

    32,500      897,462

Tokyu REIT, Inc.

    80      773,198

Nintendo Co., Ltd.

    2,000      732,589
         

Total Japan

         11,209,080
         

TAIWAN: 12.8%

      

Taiwan Semiconductor Manufacturing Co., Ltd.

    1,336,287      2,882,699

Chunghwa Telecom Co., Ltd.

    780,000      1,488,042

Taiwan Secom Co., Ltd.

    762,000      1,298,363

Giant Manufacturing Co., Ltd.

    647,000      1,187,066

President Chain Store Corp.

    372,000      1,059,429

Taiwan Semiconductor Manufacturing Co., Ltd. ADR

    17,587      195,747
         

Total Taiwan

         8,111,346
         

MALAYSIA: 9.1%

      

Public Bank BHD

    527,800      1,498,172

Maxis Communications BHD**,***

    279,500      1,243,482

Media Prima BHD

    1,375,000      1,202,752

Malayan Banking BHD

    285,300      991,629

Berjaya Sports Toto BHD

    541,200      822,969
         

Total Malaysia

         5,759,004
         

SINGAPORE: 7.1%

      

Singapore Press Holdings, Ltd.

    479,000      1,451,942

Venture Corp., Ltd.

    106,000      1,087,180

Singapore Post, Ltd.

    1,301,000      1,079,386

Yellow Pages (Singapore), Ltd.

    933,000      835,022
         

Total Singapore

         4,453,530
         

AUSTRALIA: 6.8%

      

Coca-Cola Amatil, Ltd.

    159,498      1,290,025

Insurance Australia Group, Ltd.

    257,554      1,244,622

TABCORP Holdings, Ltd.

    62,393      907,182

St. George Bank, Ltd.

    27,964      839,972
         

Total Australia

         4,281,801
         

THAILAND: 5.6%

      

Advanced Info Service Public Co., Ltd.

    540,600      1,354,436

PTT Public Co., Ltd.

    160,000      1,251,267

Hana Microelectronics Public Co., Ltd.

    1,120,600      916,928
         

Total Thailand

         3,522,631
         

SOUTH KOREA: 5.1%

      

Hana Financial Group, Inc.

    30,590      1,491,670

SK Telecom Co., Ltd.

    3,913      902,169

SK Telecom Co., Ltd. ADR

    31,300      856,055
         

Total South Korea

         3,249,894
         

 

16    MATTHEWS ASIAN FUNDS

JUNE 30, 2007

 

     SHARES    VALUE

UNITED KINGDOM: 4.6%

      

HSBC Holdings PLC ADR

    16,900    $ 1,550,913

HSBC Holdings PLC

    73,600      1,341,314
         

Total United Kingdom

         2,892,227
         

INDIA: 4.1%

      

HCL-Infosystems, Ltd.

    280,167      1,307,400

Ashok Leyland, Ltd.

    1,365,000      1,269,261
         

Total India

         2,576,661
         

PHILIPPINES: 2.5%

      

Globe Telecom, Inc.

    54,950      1,609,886
         

Total Philippines

         1,609,886
         

INDONESIA: 1.5%

      

PT Telekomunikasi Indonesia

    559,000      609,424

PT Telekomunikasi Indonesia ADR

    8,200      353,420
         

Total Indonesia

         962,844
         

NEW ZEALAND: 1.5%

      

Fisher & Paykel Appliances Holdings, Ltd.

    345,798      927,680
         

Total New Zealand

         927,680
         

TOTAL EQUITIES

(Cost $56,860,534)

         61,373,641
         

MONEY MARKET MUTUAL FUND: 1.2%*

      

BNY Hamilton Money Fund

(Cost $ 752,625)

    752,625      752,625
         

TOTAL INVESTMENTS: 98.4%

(Cost $57,613,159****)

         62,126,266

CASH AND OTHER ASSETS, LESS LIABILITIES: 1.6%

         998,373
         

NET ASSETS: 100.0%

       $ 63,124,639
         
* As a percentage of net assets as of June 30, 2007
** Fair valued under direction of the Board of Trustees
*** Illiquid security
**** Cost of investments is $57,613,159 and net unrealized appreciation consists of:

 

Gross unrealized appreciation

    $ 5,443,849  

Gross unrealized depreciation

      (930,742 )
        

Net unrealized appreciation

    $ 4,513,107  
        

ADR American Depositary Receipt

REIT Real Estate Investment Trust

See accompanying notes to financial statements.

 

800.789.ASIA [2742] www.matthewsfunds.com    17

MATTHEWS PACIFIC TIGER FUND (CLOSED TO MOST NEW INVESTORS)

 

FUND DESCRIPTION

    SYMBOL: MAPTX

Under normal market conditions, the Matthews Pacific Tiger Fund seeks to achieve its investment objective by investing at least 80% of its total net assets, which include borrowings for investment purposes, in the common and preferred stocks of companies located in the Pacific Tiger countries of China, Hong Kong, India, Indonesia, Malaysia, Philippines, Singapore, South Korea, Taiwan, Thailand and Vietnam.

PORTFOLIO MANAGERS

 

Lead Manager: Mark W. Headley

   Co-Manager: Richard H. Gao

PORTFOLIO MANAGER COMMENTARY

The Matthews Pacific Tiger Fund participated in a strong rally in the second quarter of 2007, giving the Fund a return of 15.86% for the first six months of the year. While the Fund outperformed both its indices and the Lipper averages in the second quarter, this was not enough to catch up after the underperformance in the first quarter. For the first half of the year, the MSCI All Country Far East ex-Japan Index gained 17.27% and the MSCI All Country Asia ex-Japan Index, which includes India, advanced 17.31%. During the same period, the Lipper Pacific ex-Japan Funds Category Average gained 20.39%. Markets were generally strong during the second quarter with China, India and Korea all enjoying significant rallies on the back of greater economic confidence in the regional environment.

On a geographic basis, China and Hong Kong were the dominant sources of returns for the portfolio in the first half of the year. Lenovo in China and Hang Lung Group in Hong Kong had the largest positive impact on performance. Korea, Singapore, Thailand and India all made positive contributions, with positions in Korea and Thailand showing real strength in the last few months. From an industry perspective, financials have been the primary source of returns. Property exposure in China and brokerage in Korea are examples of strong performing non-banking financials in the portfolio; the returns for bank holdings, however, were quite mixed. The information technology and consumer discretionary sectors were also areas of strength for the portfolio. The Fund’s large position in health care–related companies was the weakest area for the portfolio, with pharmaceuticals underperforming badly in a period of general market strength.

Why has the portfolio underperformed indices and competitors in the recent one- and three-year periods? It is a complex question that involves multiple issues. Certainly, we have managed the Fund with an eye to avoiding excessive risk. One example is the avoidance of ultra–high valuation growth stocks. This approach has generally not helped in a period of great enthusiasm with many top growth companies

 

continued on page 21

18    MATTHEWS ASIAN FUNDS

ALL DATA IS AS OF JUNE 30, 2007, UNLESS OTHERWISE NOTED

 

PERFORMANCE AS OF JUNE 30, 2007

 

                        Average Annual Total Returns  

Fund Inception: 9/12/94

    3 MO     YTD     1 YR     3 YRS     5 YRS     10 YRS     SINCE
INCEPTION		  

Matthews Pacific Tiger Fund

    16.70 %   15.86 %   41.66 %   30.82 %   25.34 %   10.38 %   10.27 %

MSCI All Country Far East ex-Japan Index 1

    15.58 %   17.27 %   44.21 %   30.94 %   22.61 %   4.38 %   4.05 %2

MSCI All Country Asia ex-Japan Index 3

   16.09 %   17.31 %   45.68 %   32.56 %   23.92 %   5.26 %   4.45 %2

Lipper Pacific ex-Japan Funds Category Average 4

   16.09 %   20.39 %   46.62 %   33.48 %   23.25 %   7.69 %   6.89 %2

All performance quoted is past performance and is no guarantee of future results. Assumes reinvestment of all dividends and/or distributions. Unusually high returns may not be sustainable. Investment return and principal value will fluctuate with changing market conditions so that shares, when redeemed, may be worth more or less than their original cost. The performance of foreign indices may be based on different exchange rates than those used by the Fund and, unlike the Fund’s NAV, is not adjusted to reflect fair value at the close of the NYSE. Current performance may be lower or higher than the return figures quoted. Returns are net of the Funds’ management fee and other operating expenses. Returns would have been lower if certain of the Funds’ fees and expenses had not been waived. For the Funds’ most recent month-end performance please call 800-789-ASIA [2742] or visit www.matthewsfunds.com.

LOGO

OPERATING EXPENSES5

 

Net Ratio: 6 months ended 6/30/07 (annualized) 6,7

    1.11 %

Net Ratio: Fiscal Year 2006 7

    1.16 %

Gross Ratio: Fiscal Year 2006

    1.18 %

PORTFOLIO TURNOVER8

 

6 months ended 6/30/07 (annualized) 6

   31.42 %

Fiscal Year 2006

    18.80 %

1

The MSCI All Country Far East ex-Japan Index is a free float–adjusted market capitalization–weighted index of the stock markets of China, Hong Kong, Indonesia, Malaysia, Philippines, Singapore, South Korea, Taiwan and Thailand. The Matthews Pacific Tiger Fund invests in countries that are not included in the MSCI All Country Far East ex-Japan Index. It is not possible to invest directly in an index. Source: Index data from Morgan Stanley Capital International; total return calculations performed by PFPC Inc.

2

Calculated from 8/31/94.

3

The MSCI All Country Asia ex-Japan Index is a free float–adjusted market capitalization–weighted index of the stock of markets of China, Hong Kong, India, Indonesia, Malaysia, Pakistan, Philippines, Singapore, South Korea, Taiwan, and Thailand. It is not possible to invest directly in an index. Source: Index data from Morgan Stanley Capital International; total return calculations performed by PFPC Inc.

4

As of 6/30/07, the Lipper Pacific ex-Japan Funds Category Average consisted of 46 funds for the three-month period, YTD and one-year periods; 44 funds for the three-year period; 41 funds for the five-year period; 22 funds for the 10-year period; and 9 funds since 8/31/94. Lipper, Inc. fund performance does not reflect sales charges and is based on total return, including reinvestment of dividends and capital gains, for the stated periods.

5

Matthews Asian Funds do not charge 12b-1 fees.

6

Unaudited.

7

Includes management fee, administration and shareholder services fees after reimbursement, waiver or recapture of expenses by Advisor. Voluntary fee waivers by the Advisor may be discontinued at any time.

8

The lesser of fiscal year-to-date long-term purchase costs or sales proceeds divided by the average monthly market value of long-term securities.

 

800.789.ASIA [2742] www.matthewsfunds.com    19

MATTHEWS PACIFIC TIGER FUND (CLOSED TO MOST NEW INVESTORS)

 

TOP TEN HOLDINGS1

 

    

COUNTRY

    % OF NET ASSETS

Lenovo Group, Ltd.

    China/Hong Kong    4.5%

Hang Lung Group, Ltd.

    China/Hong Kong    3.4%

Amorepacific Corp.

    South Korea    3.3%

Advanced Info Service Public Co., Ltd.

    Thailand    3.3%

Hana Financial Group, Inc.

    South Korea    2.8%

NHN Corp.

    South Korea    2.6%

DBS Group Holdings, Ltd.

    Singapore    2.5%

Dah Sing Financial Holdings, Ltd.

    China/Hong Kong    2.5%

Taiwan Semiconductor Manufacturing Co., Ltd.

    Taiwan    2.4%

Swire Pacific, Ltd.

    China/Hong Kong    2.4%

% OF ASSETS IN TOP 10

       29.7%

COUNTRY ALLOCATION

 

China/Hong Kong

    33.3 %

South Korea

    21.3 %

India 2

    10.6 %

Singapore

    10.6 %

Thailand

    9.2 %

Indonesia

    5.5 %

Taiwan

    4.8 %

Malaysia

    3.8 %

Philippines

    0.5 %

Cash, cash equivalents and other3

    0.4 %

SECTOR ALLOCATION

 

Financials

    31.7 %

Information Technology

    16.0 %

Consumer Discretionary

    15.3 %

Consumer Staples

    12.5 %

Health Care

    10.0 %

Industrials

    8.3 %

Telecommunication Services

    5.8 %

Cash, cash equivalents and other3

    0.4 %

MARKET CAP EXPOSURE

 

Large cap (over $5 billion)

    47.4 %

Mid cap ($1–$5 billion)

    43.4 %

Small cap (under $1 billion)

    8.8 %

Cash, cash equivalents and other3

    0.4 %

 

NUMBER OF SECURITIES3

    NAV    FUND ASSETS   

REDEMPTION FEE

    12B-1 FEES

69

    $27.47    $3.64 billion    2.00% within 90 calendar days    None

1

Holdings may combine more than one security from same issuer.

2

India is not included in the MSCI All Country Far East ex-Japan Index.

3

Includes BNY Hamilton Money Fund.

 

20    MATTHEWS ASIAN FUNDS

ALL DATA IS AS OF JUNE 30, 2007, UNLESS OTHERWISE NOTED

 

PORTFOLIO MANAGER COMMENTARY continued from page 18

carrying current multiples of over 50 times earnings. Often the best performing companies of the last year have been very expensive companies that are becoming extremely expensive companies. The Fund has always been willing to own exceptional growth companies that have higher valuations, but we have to be able to rationally justify the valuations.

The Fund’s long-term avoidance of highly cyclical, commodity-oriented companies has also hurt recent performance. Throughout its history, the Fund has generally avoided energy and commodity companies where we believe forward earnings are unpredictable—essentially, a roll of the dice. For the last couple of years, those companies have often been strong performers with significant earnings growth tied to the high prices of everything from oil to ship manufacturing. We do not try to predict where commodity prices are going and prefer to make our investment decisions and take our risks around industries where we see exceptional potential to build value over time.

It must be said that in some cases we have probably held on to underperforming positions too long based on valuations that seemed very attractive versus growth potential that may have been somewhat limited. Such positions appeared very defensive and hence attractive in markets where we are concerned about risks, but the price paid in a rip-roaring bull market has been significant. We have worked hard to reassess the potential of companies that have underperformed versus the potential of newer and higher growth companies that the market seems to gravitate towards. Very few significant changes have been made and we are very pleased to see a company like Lenovo move from being a significant underperformer to the portfolio’s top contributor.

As we look forward, we continue to be enthusiastic about the strong underlying economic growth across most of the region—growth that has allowed a period of exceptionally strong corporate earnings. We do not believe that the overall valuations for the region are extreme, but significant areas of the markets are very expensive by historical standards. Anything that dents the earnings outlook could lead to a significant pullback across the markets. Such a pullback, which we have highlighted as a possibility for some time, might be quite significant given the very large inflows of investment into the markets from both international and domestic investors. The impact of an ever growing weight of passive money in the markets will be a new wrinkle for the region to handle.

For the portfolio, we continue to focus on finding individual companies where we find compelling business models, strong management teams and good corporate governance practices. Such a fundamental approach is often challenging during periods of market enthusiasm, where unknown companies are frequently given extraordinarily high valuations, but we are confident in our long term approach and the performance it has generated over time.

 

800.789.ASIA [2742] www.matthewsfunds.com    21

MATTHEWS PACIFIC TIGER FUND

 

SCHEDULE OF INVESTMENTS (UNAUDITED)

EQUITIES: 99.6%*

 

     SHARES    VALUE

CHINA/HONG KONG: 33.3%

      

Lenovo Group, Ltd.

    277,656,000    $ 163,698,864

Hang Lung Group, Ltd.

    27,746,000      125,260,103

Dah Sing Financial Holdings, Ltd.

    10,893,600      91,880,617

Swire Pacific, Ltd. A Shares

    7,990,500      88,803,771

Agile Property Holdings, Ltd.

    63,112,000      82,651,279

Television Broadcasts, Ltd.

    10,362,700      72,890,897

Ping An Insurance (Group) Co. of China, Ltd. H Shares

    10,077,500      71,207,013

NWS Holdings, Ltd.

    24,775,636      61,786,999

Shangri-La Asia, Ltd.

    22,824,000      55,168,508

Dairy Farm International Holdings, Ltd.

    11,984,900      54,171,748

NetEase.com, Inc. ADR**

    2,581,300      43,933,726

Integrated Distribution Services Group, Ltd.

    11,833,000      37,379,156

Tencent Holdings, Ltd.

    9,211,000      37,106,929

China Mobile, Ltd. ADR

    668,250      36,018,675

Travelsky Technology, Ltd. H Shares †

    40,812,000      34,918,186

China Merchants Bank Co., Ltd. H Shares

    11,316,500      34,445,045

Dickson Concepts International, Ltd. †

    28,334,900      32,976,211

Dynasty Fine Wines Group, Ltd. †

   77,862,000      31,765,370

China Vanke Co., Ltd. B Shares

    13,792,093      28,557,140

Glorious Sun Enterprises, Ltd.

    35,727,000      17,271,340

SCMP Group, Ltd.

    32,396,000      13,216,600

Belle International Holdings, Ltd.**

    383,000      422,715

China High Speed Transmission Equipment Group Co., Ltd.**,***,****

    168,000      194,982
         

Total China/Hong Kong

         1,215,725,874
         

SOUTH KOREA: 21.3%

      

Amorepacific Corp.

    152,635      120,938,275

Hana Financial Group, Inc.

    2,119,653      103,361,333

NHN Corp.**

    521,132      95,048,701

Samsung Securities Co., Ltd.

    817,796      65,770,680

Hanmi Pharmaceutical Co., Ltd.†

   422,133      64,883,786

S1 Corp.

    973,120      52,508,559

Nong Shim Co., Ltd.

    161,478      45,969,274

Yuhan Corp.

    212,450      39,783,354

ON*Media Corp.**

    4,276,360      39,622,928

Hyundai Development Co.

    532,704      37,941,141

MegaStudy Co., Ltd.

    188,305      36,688,748

Hite Brewery Co., Ltd.

    271,488      35,263,906

GS Home Shopping, Inc.

    234,698      21,720,711

SK Telecom Co., Ltd. ADR

    680,300      18,606,205
         

Total South Korea

         778,107,601
         

INDIA: 10.6%

      

Cipla, Ltd.

    12,782,652      65,365,656

Titan Industries, Ltd.

    1,859,344      61,282,297

Infosys Technologies, Ltd.

    1,246,624      59,078,738

Sun Pharmaceutical Industries, Ltd.

    2,296,352      57,853,064

HDFC Bank, Ltd.

    1,952,568      55,008,165

Dabur India, Ltd.

    19,600,098      49,523,893

Bank of Baroda

    4,547,022      30,188,741

Sun Pharma Advanced Research Co., Ltd.**,***,****

    2,296,352      7,577,595
         

Total India

         385,878,149
         

SINGAPORE: 10.6%

      

DBS Group Holdings, Ltd.

    6,168,750      91,881,431

Fraser and Neave, Ltd.

    23,422,750      83,393,100

Hyflux, Ltd. †

    34,829,187      66,666,352

Venture Corp., Ltd.

    5,732,800      58,797,949

Parkway Holdings, Ltd.

    19,226,050      50,239,556

Keppel Land, Ltd.

    5,964,000      34,091,132
         

Total Singapore

         385,069,520
         

 

22    MATTHEWS ASIAN FUNDS

JUNE 30, 2007

 

     SHARES    VALUE

THAILAND: 9.2%

      

Advanced Info Service Public Co., Ltd.

    47,888,300    $ 119,980,824

Bangkok Bank Public Co., Ltd.

    21,025,400      74,296,852

Bank of Ayudhya Public Co., Ltd. NVDR

    61,539,600      43,848,636

Land & Houses Public Co., Ltd.

    173,222,300      37,629,754

Thai Beverage Public Co., Ltd.

    189,105,000      32,119,745

Amata Corp. Public Co., Ltd. †

   59,894,900      29,318,575
         

Total Thailand

         337,194,386
         

INDONESIA: 5.5%

      

PT Kalbe Farma

    322,238,500      49,575,154

PT Bank Central Asia

    69,945,500      42,191,807

PT Astra International

    21,155,730      39,571,869

PT Telekomunikasi Indonesia

    33,473,500      36,492,969

PT Ramayana Lestari Sentosa

    277,326,000      31,001,578
         

Total Indonesia

         198,833,377
         

TAIWAN: 4.8%

      

Taiwan Semiconductor Manufacturing Co., Ltd.

    41,390,673      89,289,804

President Chain Store Corp.

    29,591,000      84,273,036
         

Total Taiwan

         173,562,840
         

MALAYSIA: 3.8%

      

Resorts World BHD

    60,482,500      60,613,888

Public Bank BHD

    16,107,900      45,722,642

Top Glove Corp. BHD

    13,027,480      30,941,444
         

Total Malaysia

         137,277,974
         

PHILIPPINES: 0.5%

      

SM Prime Holdings, Inc.

    70,090,000      17,806,649
         

Total Philippines

         17,806,649
         

TOTAL EQUITIES

(Cost $2,414,902,994)

         3,629,456,370
         

MONEY MARKET MUTUAL FUND: 0.3%*

      

BNY Hamilton Money Fund

(Cost $13,670,310)

    13,670,310      13,670,310
         

TOTAL INVESTMENTS: 99.9%

(Cost $2,428,573,304*****)

         3,643,126,680

CASH AND OTHER ASSETS, LESS LIABILITIES: 0.1%

         1,810,433
         

NET ASSETS: 100.0%

       $ 3,644,937,113
         
* As a percentage of net assets as of June 30, 2007
** Non–income producing security
*** Fair valued under direction of the Board of Trustees
**** Illiquid security
***** Cost of investments is $2,428,573,304 and net unrealized appreciation consists of:

 

Gross unrealized appreciation

    $ 1,228,933,539  

Gross unrealized depreciation

      (14,380,163 )
        

Net unrealized appreciation

    $ 1,214,553,376  
        

 

† Affiliated Issuer, as defined under the Investment Company Act of 1940 (ownership of 5% or more of the outstanding voting securities of this issuer)

 

ADR American Depositary Receipt
NVDR Non-voting Depositary Receipt

See accompanying notes to financial statements.

 

800.789.ASIA [2742] www.matthewsfunds.com    23

MATTHEWS ASIAN GROWTH AND INCOME FUND

(CLOSED TO MOST NEW INVESTORS)

 

FUND DESCRIPTION

    SYMBOL: MACSX
Under normal market conditions, the Matthews Asian Growth and Income Fund seeks to achieve its investment objective by investing at least 80% of its total net assets, which include borrowings for investment purposes, in dividend-paying equity securities and the convertible securities, of any duration or quality, of companies located in Asia. Asia includes China, Hong Kong, India, Indonesia, Japan, Malaysia, Pakistan, Philippines, Singapore, South Korea, Taiwan, Thailand and Vietnam.

 

PORTFOLIO MANAGERS   
Lead Manager: G. Paul Matthews    Co-Manager: Andrew T. Foster

PORTFOLIO MANAGER COMMENTARY

During the first half of 2007, the Matthews Asian Growth and Income Fund gained 11.57%, while the benchmark MSCI All Country Far East ex-Japan Index rose 17.27% and the Lipper Pacific ex-Japan Funds Category Average advanced 20.39%. Amid the volatility of the first quarter, the Fund managed to outpace its benchmark. However, as markets rallied sharply and consistently during the second quarter, the Fund’s defensive orientation constrained its ability to keep pace. The Fund returned 8.89% during the second quarter, while the index gained 15.58%.

Several factors contributed to the Fund’s absolute gains during the period; chief among them was China. China-related stocks have undergone a marked appreciation during the past 18 months, and this surge in valuations has lifted not only the Fund’s returns, but also Asia Pacific markets more broadly. The top three performing positions within the Fund hail from disparate sectors (real estate, travel and heavy industry), yet they were united by their underlying exposure to the Chinese economy.

The recent and dramatic appreciation of China-related stocks has led some observers to suggest that the Chinese market is susceptible to a correction. This view is not without merit: Chinese shares are priced at lofty valuations and are trading at record highs. Furthermore,

LOGO

 

24

    MATTHEWS ASIAN FUNDS

ALL DATA IS AS OF JUNE 30, 2007, UNLESS OTHERWISE NOTED

 

such stocks have become volatile in recent months, as was evident in late February, when China’s “A share” markets fell 9% in a single day (note: the Fund has no positions in Chinese “A shares”). The Fund has been cautious in its exposure to Chinese stocks, trimming positions that have experienced outsized gains.

These concerns notwithstanding, we would note that the underlying pace of market reform within China remains formidable–and thus recent gains in Chinese shares are not without basis, either. The country has managed an impressive feat by privatizing and re-capitalizing the bulk of its hobbled banking sector; it has

continued on page 26

PERFORMANCE AS OF JUNE 30, 2007

 

                        Average Annual Total Returns  

Fund Inception: 9/12/94

    3 MO     YTD     1 YR     3 YRS     5 YRS     10 YRS     SINCE
INCEPTION		  

Matthews Asian Growth and Income Fund

    8.89 %   11.57 %   28.54 %   23.05 %   21.25 %   14.33 %   13.10 %

MSCI All Country Far East ex-Japan Index 1

    15.58 %   17.27 %   44.21 %   30.94 %   22.61 %   4.38 %   4.05 %3

Lipper Pacific ex-Japan Funds Category Average 3

   16.09 %   20.39 %   46.62 %   33.48 %   23.25 %   7.69 %   6.89 %3

All performance quoted is past performance and is no guarantee of future results. Assumes reinvestment of all dividends and/or distributions. Unusually high returns may not be sustainable. Investment return and principal value will fluctuate with changing market conditions so that shares, when redeemed, may be worth more or less than their original cost. The performance of foreign indices may be based on different exchange rates than those used by the Fund and, unlike the Fund’s NAV, is not adjusted to reflect fair value at the close of the NYSE. Current performance may be lower or higher than the return figures quoted. Returns are net of the Funds’ management fee and other operating expenses. Returns would have been lower if certain of the Funds’ fees and expenses had not been waived. For the Funds’ most recent month-end performance please call 800-789-ASIA [2742] or visit www.matthewsfunds.com.

30-DAY SEC YIELD4

 

1.12%

INCOME DISTRIBUTION YIELD5

 

3.05%

OPERATING EXPENSES6

 

Net Ratio: 6 months ended 6/30/07 (annualized) 7,8

    1.15 %

Net Ratio: Fiscal Year 2006 8

    1.19 %

Gross Ratio: Fiscal Year 2006

    1.20 %

PORTFOLIO TURNOVER9

 

6 months ended 6/30/07 (annualized) 6,7

   24.92 %

Fiscal Year 2006

    28.37 %

1

The MSCI All Country Far East ex-Japan Index is a free float–adjusted market capitalization–weighted index of the stock markets of China, Hong Kong, Indonesia, Malaysia, Philippines, Singapore, South Korea, Taiwan and Thailand. The Matthews Asian Growth and Income Fund invests in countries that are not included in the MSCI All Country Far East ex-Japan Index. It is not possible to invest directly in an index. Source: Index data from Morgan Stanley Capital International; total return calculations performed by PFPC Inc.

2

As of 6/30/07, the Lipper Pacific ex-Japan Funds Category Average consisted of 46 funds for the three-month,YTD and one-year periods; 44 funds for the three-year period; 41 funds for the five-year period; 22 funds for the 10-year period; and 9 funds since 8/31/94. Lipper, Inc. fund performance does not reflect sales charges and is based on total return, including reinvestment of dividends and capital gains, for the stated periods.

3

Calculated from 8/31/94.

4

The 30-day SEC Yield represents net investment income earned by the Fund over the 30-day period ended 6/30/07, expressed as an annual percentage rate based on the Fund’s share price at the end of the 30-day period. The SEC Yield should be regarded as an estimate of the Fund’s rate of investment income, and it may not equal the Fund’s actual income distribution rate, the income paid to a shareholder’s account, or the income reported in the Fund’s financial statements. Past yields are no guarantee of future yields.

5

The Income Distribution Yield represents the past two dividends (does not include capital gains) paid by the Fund for the period ended 6/30/07, expressed as an annual percentage rate based on the Fund’s share price on 6/30/07. Generally, the Fund has made distributions of net investment income twice each year and of capital gains, if any, annually. Past Income Distribution Yields are no guarantee of future yields or that any distributions will continue to be paid twice each year.

6

Matthews Asian Funds do not charge 12b-1 fees.

7

Unaudited.

8

Includes management fee, administration and shareholder services fees after reimbursement, waiver or recapture of expenses by Advisor. Voluntary fee waivers by the Advisor may be discontinued at any time.

9

The lesser of fiscal year-to-date long-term purchase costs or sales proceeds divided by the average monthly market value of long-term securities.

 

800.789.ASIA [2742] www.matthewsfunds.com    25

MATTHEWS ASIAN GROWTH AND INCOME FUND

(CLOSED TO MOST NEW INVESTORS)

 

TOP TEN HOLDINGS1

 

HOLDING

  

COUNTRY

  

SECURITY TYPE

   % OF NET ASSETS

HSBC Holdings PLC

   United Kingdom   Equity   2.8%

Hongkong Land Ltd., Cnv.

   China/Hong Kong   Convertible Bond   2.7%

Hang Lung Group, Ltd.

   China/Hong Kong   Equity   2.7%

SK Telecom Co., Ltd.

   South Korea   Equity   2.7%

Singapore Press Holdings, Ltd.

   Singapore   Equity   2.4%

Fraser and Neave, Ltd.

   Singapore   Equity   2.4%

Housing Development Finance Corp., Cnv.

   India   Convertible Bond   2.2%

Far EasTone Telecommunications Co., Ltd.

   Taiwan   Equity   2.2%

Rafflesia Capital, Ltd., Cnv.

   Malaysia   Convertible Bond   2.2%

CNOOC Finance, Ltd., Cnv.

   China/Hong Kong   Convertible Bond   2.2%

% OF ASSETS IN TOP 10

       24.5%

COUNTRY ALLOCATION

 

China/Hong Kong

    30.5 %

South Korea

    14.8 %

Singapore

    12.9 %

Taiwan

    11.1 %

India 2

    8.7 %

Thailand

    4.4 %

Australia 2

    3.6 %

Malaysia

    3.6 %

Japan 2

    3.4 %

United Kingdom 2

    2.8 %

Indonesia

    2.1 %

Philippines

    1.0 %

Cash, cash equivalents and other 3

    1.1 %

SECTOR ALLOCATION

 

Financials

    28.2 %

Telecommunication Services

    21.0 %

Consumer Discretionary

    16.2 %

Utilities

    9.2 %

Industrials

    7.9 %

Information Technology

    4.4 %

Health Care

    4.3 %

Consumer Staples

    4.1 %

Energy

    3.1 %

Materials

    0.5 %

Cash, cash equivalents and other 3

    1.1 %

MARKET CAP EXPOSURE

 

Large cap (over $5 billion)

    60.6 %

Mid cap ($1–$5 billion)

    30.7 %

Small cap (under $1 billion)

    7.6 %

Cash, cash equivalents and other 3

    1.1 %

BREAKDOWN BY SECURITY4

 

Common Equities

    75.2 %

Convertible Bonds

    20.3 %

Preferred Equities

    3.4 %

Cash, cash equivalents and other3

    1.1 %

 

NUMBER OF SECURITIES3

    NAV    FUND ASSETS   

REDEMPTION FEE

    12B-1 FEES

84

    $20.12    $2.23 billion    2.00% within 90 calendar days    None

1

Holdings may combine more than one security from same issuer.

2

India, Australia, Japan and the United Kingdom are not included in the MSCI All Country Far East ex-Japan Index.

3

Includes BNY Hamilton Money Fund.

4

As of 6/30/07, convertible bonds, which are not reflected in the Fund’s benchmark, the MSCI All Country Far East ex-Japan Index, accounted for 20.3% of the Matthews Asian Growth and Income Fund.

PORTFOLIO MANAGER COMMENTARY continued from page 25

revitalized its onshore financial markets via necessary regulatory reforms; lastly—and most importantly—it has demonstrated a gradual but consistent resolve to dismantle the capital controls that have underpinned its currency policy for well over a decade. The cumulative impact of these reforms is substantial, and underscores the Chinese authorities’ intent to modernize the country’s economy and financial system. Thus, even as China’s markets touch precipitous new highs, they have been catalyzed by a series of positive and material fundamental events.

 

26    MATTHEWS ASIAN FUNDS

ALL DATA IS AS OF JUNE 30, 2007, UNLESS OTHERWISE NOTED

 

Hang Lung Group was the single largest contributor to the Fund’s gains during the first half of the year. The company’s story is an important one, as it illustrates how rapidly China’s financial landscape is evolving. Hang Lung Group is a holding company; its primary asset is the stake it holds in its subsidiary, Hang Lung Properties. The Fund has continuously held a position in either Hang Lung Group or Hang Lung Properties since 1998. A decade ago, Hang Lung was a medium-sized company specializing in the development of mid-market and luxury residential properties in Hong Kong. Now the company is one of Hong Kong’s largest publicly listed real estate companies, with operations that span both Hong Kong and China. The company continues to develop residential properties in both countries, but in China it has expanded its scope to include office space and retail malls, as both a developer and an investor.

Hang Lung’s first tentative investments in China were made 15 years ago; however it began its expansion into the country in earnest only in 2005. The company’s rapid shift into China has been remarkable, particularly given the level of investment: Hang Lung has invested over $4 billion in China for a handful of projects that represent 6.3 million square feet of floor space. This extensive corporate transformation is first and foremost the result of management’s vision and execution capability. However, none of it would have occurred had not China itself undergone substantial reform and change. China’s property market—though often lacking in its transparency and professionalism—has become much more open in recent years. In particular, Hang Lung has executed several transactions with smaller city governments that are seeking to revitalize their civic centers. Such opportunities would have been almost non-existent a decade ago—and rarely open to foreign companies, even those of Hong Kong origin.

Hang Lung’s ability to penetrate this market segment has been critical, but equally important has been its ability to quickly raise large amounts of capital in Hong Kong’s markets, and then immediately funnel the proceeds into China to support its transaction activities there. Last November, Hang Lung Properties raised the equivalent of $860 million in a single day, without advance notice; those funds were then quickly deployed within China. The fact that Hang Lung can tap public capital markets with such speed and in such size, and then use the proceeds to immediately support its onshore business, speaks volumes about how much more readily capital flows through China’s ostensibly “closed” capital account.

Turning to Japan, the Fund’s orientation towards that market remains cautious, even as there are more reasons for investors to be constructive. The Japanese economy has expanded for 19 consecutive quarters; currently, macroeconomic growth appears to be accelerating, as do corporate profits; and in substantial segments of the market, dividend growth appears to be outpacing earnings growth.

However, a substantial drawback continues to cloud Japan’s horizon, namely that the threat of deflation has not been conclusively defeated. During the past twelve months, the Bank of Japan (BOJ) has raised interest rates twice to stem what it believed were growing inflation-ary pressures – and, as some parties suggest, to eliminate the so-called “carry trade.” Whatever the case, the BOJ’s actions appear to have constrained the prospects for price growth in the country. Without sufficient expansion in the country’s money supply, deflationary conditions may persist; indeed, the latest reading on core consumer inflation fell slightly below zero. This sort of environment may render the country’s growth prospects less certain. The Fund has maintained a modest allocation to Japan, in recognition of the fundamental improvements in the economy; but unless and until Japan enjoys a more accommodative monetary policy, strong stock markets there may prove elusive.

 

800.789.ASIA [2742] www.matthewsfunds.com    27

MATTHEWS ASIAN GROWTH AND INCOME FUND

SCHEDULE OF INVESTMENTS (UNAUDITED)

COMMON EQUITIES: 75.2%*

 

     SHARES    VALUE

CHINA/HONG KONG: 24.8%

      

Hang Lung Group, Ltd.

    13,310,000    $ 60,088,372

Hang Seng Bank, Ltd.

    3,449,300      46,671,775

CLP Holdings, Ltd.

    6,846,200      45,923,265

CITIC Pacific, Ltd.

    8,970,000      45,026,665

Television Broadcasts, Ltd.

    5,262,000      37,012,738

Café de Coral Holdings, Ltd.

    17,353,100      32,889,930

China Travel International Investment HK, Ltd.

    61,960,000      32,488,746

HongKong Electric Holdings, Ltd.

    5,914,500      29,840,268

I-CABLE Communications, Ltd. †

    129,144,000      27,417,004

Giordano International, Ltd.

    54,735,000      27,020,296

PCCW, Ltd.

    42,920,000      26,402,343

ASM Pacific Technology, Ltd.

    3,559,500      25,788,530

Shangri-La Asia, Ltd.

    8,065,740      19,495,918

Hong Kong & China Gas Co., Ltd.

    8,787,900      18,521,664

Hang Lung Properties, Ltd.

    5,216,920      17,980,867

Vitasoy International Holdings, Ltd.

    39,017,000      17,963,628

Cheung Kong Infrastructure Holdings, Ltd.

    4,475,500      16,512,965

PetroChina Co., Ltd. H Shares

    9,014,000      13,280,295

PetroChina Co., Ltd. ADR

    60,350      8,972,838

China-Hong Kong Photo Products Holdings, Ltd.

    14,998,003      2,014,004
         

Total China/Hong Kong

         551,312,111
         

SINGAPORE: 12.9%

      

Singapore Press Holdings, Ltd.

    17,514,500      53,089,845

Fraser and Neave, Ltd.

    14,832,100      52,807,411

Parkway Holdings, Ltd.

    14,242,200      37,216,267

DBS Group Holdings, Ltd.

    2,486,000      37,028,123

StarHub, Ltd.**

    15,836,071      31,656,624

Ascendas REIT

    13,748,000      26,404,782

Singapore Post, Ltd.

    27,747,000      23,020,539

Cerebos Pacific, Ltd.

    4,060,000      10,715,270

CapitaMall Trust REIT

    3,458,900      9,535,560

Yellow Pages (Singapore), Ltd.

    6,638,000      5,940,918
         

Total Singapore

         287,415,339
         

TAIWAN: 11.1%

      

Far EasTone Telecommunications Co., Ltd.

    39,790,000      49,395,485

Cathay Financial Holding Co., Ltd.

    17,154,705      40,973,783

President Chain Store Corp.

    13,430,000      38,247,672

Chunghwa Telecom Co., Ltd. ADR

    1,907,950      35,983,937

Taiwan Semiconductor Manufacturing Co., Ltd.

    16,055,214      34,635,024

Taiwan Secom Co., Ltd.

    14,276,779      24,326,040

SinoPac Financial Holdings Co., Ltd.

    38,988,047      18,624,485

Chunghwa Telecom Co., Ltd.

    3,073,960      5,864,337
         

Total Taiwan

         248,050,763
         

SOUTH KOREA: 7.9%

      

SK Telecom Co., Ltd.

    210,015      48,420,409

Hana Financial Group, Inc.

    685,369      33,420,873

KT Corp.

    505,730      23,648,358

Korea Electric Power Corp.

    480,590      21,328,343

KT Corp. ADR

    718,800      16,863,048

SK Telecom Co., Ltd. ADR

    395,300      10,811,455

Daehan City Gas Co., Ltd.

    280,300      10,285,403

Korea Electric Power Corp. ADR

    259,750      5,688,525

G11R, Inc.

    309,540      4,891,794
         

Total South Korea

         175,358,208
         

THAILAND: 4.4%

      

Advanced Info Service Public Co., Ltd.

    18,935,000      47,440,333

BEC World Public Co., Ltd.

    47,386,400      31,568,058

Charoen Pokphand Foods Public Co., Ltd.

    80,579,900      12,136,582

Thai Reinsurance Public Co., Ltd.

    25,672,800      4,573,142

Aeon Thana Sinsap Public Co., Ltd.

    864,400      1,239,328
         

Total Thailand

         96,957,443
         
28    MATTHEWS ASIAN FUNDS

JUNE 30, 2007

 

     SHARES    VALUE

AUSTRALIA: 3.6%

      

Insurance Australia Group, Ltd.

    7,864,808    $ 38,006,460

AXA Asia Pacific Holdings, Ltd.

    5,391,885      33,964,394

Fairfax Media, Ltd.

    2,262,260      9,014,358
         

Total Australia

         80,985,212
         

JAPAN: 3.4%

      

Nippon Building Fund, Inc. REIT

    2,538      35,248,568

Tokyu REIT, Inc.

    1,927      18,624,406

Japan Real Estate Investment Corp. REIT

    893      10,516,548

Japan Retail Fund Investment Corp. REIT

    1,202      10,445,807
         

Total Japan

         74,835,329
         

UNITED KINGDOM: 2.8%

      

HSBC Holdings PLC ADR

    630,500      57,860,985

HSBC Holdings PLC

    196,800      3,586,556
         

Total United Kingdom

         61,447,541
         

INDONESIA: 2.1%

      

PT Telekomunikasi Indonesia ADR

    745,500      32,131,050

PT Tempo Scan Pacific

    139,445,000      15,279,530
         

Total Indonesia

         47,410,580
         

INDIA: 1.2%

      

Gail India, Ltd.

    3,597,158      27,421,647
         

Total India

         27,421,647
         

PHILIPPINES: 1.0%

      

Globe Telecom, Inc.

    781,160      22,885,877
         

Total Philippines

         22,885,877
         

TOTAL COMMON EQUITIES

(Cost $1,174,039,265)

         1,674,080,050
         

PREFERRED EQUITIES: 3.4%*

      

SOUTH KOREA: 3.4%

      

Hyundai Motor Co., Ltd., Pfd.

    566,280      25,866,771

Hyundai Motor Co., Ltd., 2nd Pfd.

    305,760      14,645,105

LG Household & Health Care, Ltd., Pfd.

    177,830      11,876,507

Samsung Fire & Marine Insurance Co., Ltd., Pfd.

    119,550      11,335,801

LG Chem, Ltd., Pfd.

    242,450      11,074,731
         

Total South Korea

         74,798,915
         

TOTAL PREFERRED EQUITIES

(Cost $25,013,795)

         74,798,915
         

See footnotes on page 31.

 

800.789.ASIA [2742] www.matthewsfunds.com    29

MATTHEWS ASIAN GROWTH AND INCOME FUND

SCHEDULE OF INVESTMENTS (UNAUDITED) (continued)

INTERNATIONAL DOLLAR BONDS: 20.3%*

 

     FACE
AMOUNT		    VALUE

INDIA: 7.5%

      

Housing Development Finance Corp., Cnv.

      

0.000%, 09/27/10

    $ 31,800,000    $ 50,005,500

Sun Pharmaceutical Industries, Ltd., Cnv.

      

0.000%, 11/26/09

      26,269,000      42,687,125

Reliance Communications, Ltd., Cnv.

      

0.000%, 05/10/11

      22,290,000      29,116,312

Tata Motors, Ltd., Cnv.

      

1.000%, 04/27/11

      23,449,000      27,904,310

Tata Power Co., Ltd., Cnv.

      

1.000%, 02/25/10

      14,464,000      17,646,080
         

Total India

         167,359,327
         

CHINA/HONG KONG: 5.7%

      

Hongkong Land CB 2005, Ltd., Cnv.

      

2.750%, 12/21/12

      48,400,000      61,092,900

CNOOC Finance 2004, Ltd., Cnv.

      

0.000%, 12/15/09

      31,603,000      48,076,064

Brilliance China Finance, Ltd. Cnv.

      

0.000%, 06/07/11

      14,950,000      18,022,225
         

Total China/Hong Kong

         127,191,189
         

MALAYSIA: 3.6%

      

Rafflesia Capital, Ltd. Cnv.

      

1.250%, 10/04/11

      42,100,000      48,415,000

Prime Venture Labuan, Ltd., Cnv.

      

1.000%, 12/12/08

      14,740,000      21,078,200

YTL Power Finance Cayman, Ltd., Cnv.

      

0.000%, 05/09/10

      9,400,000      10,960,400
         

Total Malaysia

         80,453,600
         

SOUTH KOREA: 3.5%

      

SK Telecom Co., Ltd., Cnv.

      

0.000%, 05/27/09

      29,430,000      38,729,880

LG Philips LCD Co., Ltd., Cnv.

      

0.000%, 04/19/10

      35,200,000      38,016,000
         

Total South Korea

         76,745,880
         

TOTAL INTERNATIONAL DOLLAR BONDS

(Cost $377,135,857)

         451,749,996
         

 

30    MATTHEWS ASIAN FUNDS

JUNE 30, 2007

 

     SHARES    VALUE

MONEY MARKET MUTUAL FUND: 0.9%*

      

BNY Hamilton Money Fund

(Cost $21,165,727)

    21,165,727    $ 21,165,727
         

TOTAL INVESTMENTS: 99.8%

(Cost $1,597,354,644***)

         2,221,794,688

CASH AND OTHER ASSETS, LESS LIABILITIES: 0.2%

         3,640,483
         

NET ASSETS: 100.0%

       $ 2,225,435,171
         
* As a percentage of net assets as of June 30, 2007
** Non–income producing security
*** Cost of investments is $1,597,354,644 and net unrealized appreciation consists of:

 

Gross unrealized appreciation

    $ 637,080,026  

Gross unrealized depreciation

      (12,639,982 )
        

Net unrealized appreciation

    $ 624,440,044  
        

 

† Affiliated Issuer, as defined under the Investment Company Act of 1940 (ownership of 5% or more of the outstanding voting securities of this issuer)
ADR American Depositary Receipt
Cnv. Convertible
Pfd. Preferred
REIT Real Estate Investment Trust

See accompanying notes to financial statements.

 

800.789.ASIA [2742] www.matthewsfunds.com    31

MATTHEWS ASIAN TECHNOLOGY FUND

 

FUND DESCRIPTION

    SYMBOL: MATFX

Under normal market conditions, the Matthews Asian Technology Fund seeks to achieve its investment objective by investing at least 80% of its total net assets, which include borrowings for investment purposes, in the common and preferred stocks of companies located in Asia that derive greater than 50% of their revenues from the sale of products or services in technology-related industries and services. Asia includes China, Hong Kong, India, Indonesia, Japan, Malaysia, Pakistan, Philippines, Singapore, South Korea, Taiwan, Thailand and Vietnam.

 

Matthews considers technology-related industries and businesses to include, but not be limited to, the following: telecommunications, telecommunications equipment, computers, semiconductors, semiconductor capital equipment, networking, Internet and online service companies, media, office automation, server hardware producers, software companies (e.g., design, consumer and industrial), biotechnology and medical device technology companies, pharmaceuticals and companies involved in the distribution and servicing of these products.

 

PORTFOLIO MANAGERS   
Lead Manager: J. Michael Oh    Co-Manager: Mark W. Headley

PORTFOLIO MANAGER COMMENTARY

For the six-month period ended June 30, 2007, the Matthews Asian Technology Fund gained 11.49%, outperforming both the MSCI/Matthews Asian Technology Index and the Lipper Science and Technology Funds Category Average, which gained 6.48% and 10.33%, respectively. After a slow start in the first quarter of the year, the Asian technology sector had a strong rally in the second quarter as prices of key products recovered, and demand for consumer electronics, especially in the video gaming industry, remained strong. Demand for Inter-net services also remained strong and helped the overall sector perform well during the first half of the year.

The Fund gained most from its positions in the software and services sector. Internet services such as keyword search, multimedia content, and games (casual and massive-multi-online-role-playing) continued to experience strong demand. The overall penetration rate of broadband in Asia, especially in developing countries such as China and India, remains low. In more developed countries such as Korea, the growth rate in the Internet sector, especially in search, remained very healthy during the six-month period. The telecommunications sector also performed well in the first half of the year. The overall valuation of the telecommunication services sector in developed countries remained attractive, while growth expectations in developing countries continued to lead the sector’s strong overall performance.

The technology hardware and equipment industry was one of the weakest sectors during the past six months due to concerns over declining prices and weak demand for key

 

continued on page 35

 

32    MATTHEWS ASIAN FUNDS

ALL DATA IS AS OF JUNE 30, 2007, UNLESS OTHERWISE NOTED

 

PERFORMANCE AS OF JUNE 30, 2007

 

                       Average Annual Total Returns  

Fund Inception: 12/27/99

    3 MO     YTD     1 YR     3 YRS     5 YRS     SINCE
INCEPTION		  

Matthews Asian Technology Fund

    12.48 %   11.49 %   33.38 %   20.08 %   19.54 %   –0.92 %

MSCI/Matthews Asian Technology Index 1

   6.77 %   6.48 %   21.13 %   13.93 %   11.05 %   –6.78 %2

Lipper Science and Technology Funds Category Average 3

    9.08 %   10.33 %   21.27 %   8.68 %   11.87 %   –8.53 %2

All performance quoted is past performance and is no guarantee of future results. Assumes reinvestment of all dividends and/or distributions. Unusually high returns may not be sustainable. Investment return and principal value will fluctuate with changing market conditions so that shares, when redeemed, may be worth more or less than their original cost. The performance of foreign indices may be based on different exchange rates than those used by the Fund and, unlike the Fund’s NAV, is not adjusted to reflect fair value at the close of the NYSE. Current performance may be lower or higher than the return figures quoted. Returns are net of the Funds’ management fee and other operating expenses. Returns would have been lower if certain of the Funds’ fees and expenses had not been waived. For the Funds’ most recent month-end performance please call 800-789-ASIA [2742] or visit www.matthewsfunds.com.

LOGO

OPERATING EXPENSES4

 

Net Ratio: 6 months ended 6/30/07 (annualized) 5,6

    1.26 %

Net Ratio: Fiscal Year 2006 6

    1.39 %

Gross Ratio: Fiscal Year 2006

    1.41 %

PORTFOLIO TURNOVER7

 

6 months ended 6/30/07 (annualized) 5

   49.58 %

Fiscal Year 2006

    34.77 %

1

The MSCI/Matthews Asian Technology Index is a free float–adjusted market capitalization–weighted index of Asian equities tracking a broad range of technology stocks including semiconductor equipment and products, communications equipment, computers and peripherals, electronic equipment and instruments, office electronics, software, IT consulting and services, Internet software and services, diversified telecommunications services, and wireless telecommunications services. It is not possible to invest directly in an index. Source: Index data from Morgan Stanley Capital International; total return calculations performed by PFPC Inc.

2

Calculated from 12/31/99.

3

As of 6/30/07, the Lipper Science and Technology Funds Category Average consisted of 291 funds for the three-month period, 288 funds for the YTD period, 283 funds for the one-year period, 257 funds for the three-year period, 237 funds for the five-year period, and 112 funds since 12/31/99. Lipper, Inc. fund performance does not reflect sales charges and is based on total return, including reinvestment of dividends and capital gains, for the stated periods.

4

Matthews Asian Funds do not charge 12b-1 fees.

5

Unaudited.

6

Includes management fee, administration and shareholder services fees after reimbursement, waiver or recapture of expenses by Advisor. Voluntary fee waivers by the Advisor may be discontinued at any time.

7

The lesser of fiscal year-to-date long-term purchase costs or sales proceeds divided by the average monthly market value of long-term securities.

 

800.789.ASIA [2742] www.matthewsfunds.com    33

MATTHEWS ASIAN TECHNOLOGY FUND

 

TOP TEN HOLDINGS1

 

    

COUNTRY

    % OF NET ASSETS

Samsung Electronics Co., Ltd.

    South Korea    6.6%

NHN Corp.

    South Korea    4.8%

The9, Ltd.

    China/Hong Kong    4.2%

Nintendo Co., Ltd.

    Japan    3.8%

Hon Hai Precision Industry Co., Ltd.

    Taiwan    3.6%

China Mobile, Ltd.

    China/Hong Kong    3.6%

Sony Corp.

    Japan    3.2%

Canon, Inc.

    Japan    3.0%

Tencent Holdings, Ltd.

    China/Hong Kong    3.0%

Baidu.com

    China/Hong Kong    2.9%

% OF ASSETS IN TOP 10

       38.7%

COUNTRY ALLOCATION

 

Japan

    30.4 %

China/Hong Kong

    21.4 %

South Korea

    19.8 %

Taiwan

    13.5 %

India

    9.4 %

Indonesia

    1.5 %

Thailand

    1.3 %

Singapore

    1.0 %

Malaysia

    0.9 %

Cash, cash equivalents and other2

    0.8 %

SECTOR ALLOCATION

 

Information Technology

    67.8 %

Telecommunication Services

    12.1 %

Consumer Discretionary

    11.0 %

Health Care

    3.4 %

Materials

    3.3 %

Industrials

    1.6 %

Cash, cash equivalents and other2

    0.8 %

MARKET CAP EXPOSURE

 

Large cap (over $5 billion)

    77.0 %

Mid cap ($1–$5 billion)

    12.7 %

Small cap (under $1 billion)

    9.5 %

Cash, cash equivalents and other2

    0.8 %

 

NUMBER OF SECURITIES2

    NAV    FUND ASSETS   

REDEMPTION FEE

    12B-1 FEES
48    $8.83    $159.3 million    2.00% within 90 calendar days    None

1

Holdings may combine more than one security from same issuer.

2

Includes BNY Hamilton Money Fund.

 

34    MATTHEWS ASIAN FUNDS

ALL DATA IS AS OF JUNE 30, 2007, UNLESS OTHERWISE NOTED

 

PORTFOLIO MANAGER COMMENTARY continued from page 32

consumer electronics. The first half of the year is typically a slow season for consumer electronics sales, as consumers do most of their spending in the last quarter of the year. However, the technology hardware and equipment sector managed to rally in the second quarter, regaining some of the losses incurred during the first quarter. The semiconductor industry, which was one of the worst performing industries during the first quarter, also made a comeback in the second quarter and finished the first half of the year in positive territory. The price of DRAM and flash memory products rose during the second quarter, helping the overall semiconductor industry to recover.

On a company basis, the largest contributor to performance during the first half of 2007 was NHN, Korea’s dominant Internet search company, which also has a strong franchise in the casual game and portal business. NHN recorded strong growth during the first quarter, and its positive outlook for the rest of the year further contributed to the company’s strong performance. The9, a Shanghai-based online game operator and distributor, was the second largest contributor to Fund performance. The9 secured the rights to distribute several hit games in the Chinese market, which is growing faster than many other markets in Asia. Baidu, a Beijing-based Internet company with dominant market share in China’s keyword search market, was the largest contributor to Fund performance during the second quarter. Not only has Baidu maintained its leadership in the market, but it has further expanded its market share in China.

Conversely, CDNetworks was the worst performer in the Fund during the first half of the year. CDNetworks develops and provides content delivery network (CDN) services, mainly in Korea. The company has been suffering from losses at a subsidiary that provides user-created-content (UCC) online, similar to YouTube in the U.S. Samsung Electronics was the second worst performer in the Fund for the six-month period, as the company has been hurt by the declining price of memory products.

By country, overall returns were strongest in China and Taiwan, while the Fund’s positions in Japan relatively underperformed. Positively speaking, Internet companies in China were the strongest contributors to Fund performance. China’s low broadband penetration rate and the positive outlook for earnings helped Chi-nese Internet companies in the Fund outperform during the six-month period. Taiwanese companies made a strong comeback in the second quarter after generally underperforming relative to other countries in the first quarter. Strong growth in the electronic manufacturing services (EMS) industry helped the Taiwanese technology sector recover from the first quarter. In contrast, the Fund’s holdings in Indonesia and Thailand generally underperformed due to weakness in the telecommunications sector.

The Fund continues to look for long-term opportunities in a broad range of technology industries that we believe are poised to benefit from increasing demand from Asian consumers and overall growth in the Asia Pacific region.

 

800.789.ASIA [2742] www.matthewsfunds.com    35

MATTHEWS ASIAN TECHNOLOGY FUND

 

SCHEDULE OF INVESTMENTS (UNAUDITED)

EQUITIES: 99.2%*

 

     SHARES    VALUE

JAPAN: 30.4%

      

Nintendo Co., Ltd.

    16,585    $ 6,074,993

Sony Corp.

    100,300      5,156,540

Canon, Inc. ADR

    81,800      4,796,752

Sumco Corp.

    76,400      3,840,942

Murata Manufacturing Co., Ltd.

    45,700      3,448,146

Yahoo! Japan Corp.

    9,132      3,103,953

KDDI Corp.

    399      2,958,676

Hoya Corp.

    83,000      2,757,117

Sharp Corp.

    131,000      2,489,665

Keyence Corp.

    10,650      2,329,377

Ibiden Co., Ltd.

    35,600      2,301,531

Nitto Denko Corp.

    42,200      2,131,850

Hirose Electric Co., Ltd.

    14,700      1,936,520

NTT Data Corp.

    372      1,767,472

Nomura Research Institute, Ltd.

    58,700      1,730,607

Eisai Co., Ltd.

    36,900      1,612,361
         

Total Japan

         48,436,502
         

CHINA/HONG KONG: 21.4%

      

The9, Ltd. ADR**

    145,008      6,708,070

China Mobile, Ltd. ADR

    106,400      5,734,960

Tencent Holdings, Ltd.

    1,176,000      4,737,569

Baidu.com ADR**

    27,300      4,585,854

Sina Corp.**

    70,000      2,930,200

Focus Media Holding, Ltd. ADR**

    54,600      2,757,300

China Communications Services Corp., Ltd. H Shares**

    3,680,000      2,710,866

Ctrip.com International, Ltd. ADR

    30,300      2,382,489

ZTE Corp. H Shares

    323,800      1,540,485
         

Total China/Hong Kong

         34,087,793
         

SOUTH KOREA: 19.8%

      

Samsung Electronics Co., Ltd.

    17,175      10,522,325

NHN Corp.**

    42,222      7,700,825

ON*Media Corp.**

    356,210      3,300,490

Techno Semichem Co., Ltd.

    92,655      3,134,133

CDNetworks Co., Ltd.**

    115,370      2,816,035

JVM Co., Ltd.

    41,693      2,482,129

Osstem Implant Co., Ltd.**

    33,733      1,588,337
         

Total South Korea

         31,544,274
         

TAIWAN: 13.5%

      

Hon Hai Precision Industry Co., Ltd.

    671,218      5,800,095

Taiwan Semiconductor Manufacturing Co., Ltd.

    2,102,911      4,536,494

MediaTek, Inc.

    251,400      3,916,412

InnoLux Display Corp.**

    634,000      2,623,501

Foxconn Technology Co., Ltd.

    208,950      2,511,265

Foxconn International Holdings, Ltd.**

    759,000      2,174,340
         

Total Taiwan

         21,562,107
         

INDIA: 9.4%

      

Infosys Technologies, Ltd.

    93,820      4,446,222

Bharti Airtel, Ltd.**

    175,589      3,606,034

Tata Consultancy Services, Ltd.

    96,864      2,735,061

Glenmark Pharmaceuticals, Ltd.

    135,218      2,182,821

Info Edge India, Ltd.**

    106,030      2,031,254
         

Total India

         15,001,392
         

INDONESIA: 1.5%

      

PT Telekomunikasi Indonesia ADR

    55,400      2,387,740
         

Total Indonesia

         2,387,740
         

 

36    MATTHEWS ASIAN FUNDS

JUNE 30, 2007

 

     SHARES    VALUE  

THAILAND: 1.3%

      

Advanced Info Service Public Co., Ltd.

    787,500    $ 1,973,027  
           

Total Thailand

         1,973,027  
           

SINGAPORE: 1.0%

      

Unisteel Technology, Ltd.

    1,111,000      1,625,765  
           

Total Singapore

         1,625,765  
           

MALAYSIA: 0.9%

      

Media Prima BHD

    1,651,300      1,444,439  
           

Total Malaysia

         1,444,439  
           

TOTAL EQUITIES

(Cost $116,208,988)

         158,063,039  
           

MONEY MARKET MUTUAL FUND: 0.8%*

      

BNY Hamilton Money Fund

(Cost $1,341,574)

    1,341,574      1,341,574  
           

TOTAL INVESTMENTS: 100.0%

(Cost $117,550,562***)

         159,404,613  

LIABILITIES IN EXCESS OF CASH AND OTHER ASSETS: 0.0%

         (79,794 )
           

NET ASSETS: 100.0%

       $ 159,324,819  
           
* As a percentage of net assets as of June 30, 2007
** Non–income producing security
*** Cost of investments is $117,550,562 and net unrealized appreciation consists of:

 

Gross unrealized appreciation

    $ 45,415,188  

Gross unrealized depreciation

      (3,561,137 )
        

Net unrealized appreciation

    $ 41,854,051  
        

 

ADR American Depositary Receipt

See accompanying notes to financial statements.

 

800.789.ASIA [2742] www.matthewsfunds.com    37

MATTHEWS CHINA FUND

 

FUND DESCRIPTION

    SYMBOL: MCHFX
Under normal market conditions, the Matthews China Fund seeks to achieve its investment objective by investing at least 80% of its total net assets, which include borrowings for investment purposes, in the common and preferred stocks of companies located in China. China includes its political, administrative and other districts, such as Hong Kong.

PORTFOLIO MANAGERS

Lead Manager: Richard H. Gao

Co-Managers: Mark W. Headley and G. Paul Matthews

PORTFOLIO MANAGER COMMENTARY

For the six months ending June 30, 2007, the Matthews China Fund gained 29.14%, outperforming both its benchmark MSCI China Index as well as the Lipper China Region Funds Category Average, which gained 21.59% and 25.01%, respectively. After a volatile trading period in the first quarter, Chinese equities listed in Hong Kong had three consecutive months of strong gains during the second quarter, driven by continued economic growth, strong liquidity in the market, and positive news on the approval of the Qualified Domestic Institutional Investors (QDII) program, which allows domestic Chinese institutions to invest in the Hong Kong equities market.

China’s fast-growing economy did not show any signs of slowing down during the first half of 2007. Instead, momentum accelerated and the overall economy grew even faster. GDP grew 11.1% in the first quarter of this year—one of the highest quarterly growth rates recorded since 1995. During the first five months of the year, fixed asset investment grew 26% compared to the corresponding period last year. This growth was led by increased investment in the real estate and resources industries. Corporate profits also rose significantly, with industrial companies in China reporting year-on-year earnings growth of 42% from January to May. Meanwhile, inflation appears to be under control; the latest economic data shows that although trending slightly up, China’s Consumer Price Index (CPI) remained relatively low in June at 3.5%.

In this environment, the equity markets were strong. During the first half of the year, the Fund recorded positive returns in every sector in which it was invested. Performance was led by the industrial, financial and materials sectors. After being the top contributors to Fund performance in the first quarter, industrial and material companies continued their strong performance in the second quarter. China’s red-hot economy has provided huge growth opportunities for the construction, machinery, and other infrastructure-related industrial companies in the portfolio. After underperforming the overall market in the first quarter, financial companies—especially

 

continued on page 41

 

38    MATTHEWS ASIAN FUNDS

ALL DATA IS AS OF JUNE 30, 2007, UNLESS OTHERWISE NOTED

 

PERFORMANCE AS OF JUNE 30, 2007

 

                        Average Annual Total Returns  

Fund Inception: 2/19/98

    3 MO     YTD     1 YR     3 YRS     5 YRS     SINCE
INCEPTION		  

Matthews China Fund

    24.85 %   29.14 %   77.78 %   35.51 %   27.29 %   15.19 %

MSCI China Index 1

    24.45 %   21.59 %   79.75 %   44.87 %   34.65 %   4.28 %2

Lipper China Region Funds Category Average 3

   21.53 %   25.01 %   66.59 %   35.66 %   25.89 %   12.81 %2

All performance quoted is past performance and is no guarantee of future results. Assumes reinvestment of all dividends and/or distributions. Unusually high returns may not be sustainable. Investment return and principal value will fluctuate with changing market conditions so that shares, when redeemed, may be worth more or less than their original cost. The performance of foreign indices may be based on different exchange rates than those used by the Fund and, unlike the Fund’s NAV, is not adjusted to reflect fair value at the close of the NYSE. Current performance may be lower or higher than the return figures quoted. Returns are net of the Funds’ management fee and other operating expenses. Returns would have been lower if certain of the Funds’ fees and expenses had not been waived. For the Funds’ most recent month-end performance please call 800-789-ASIA [2742] or visit www.matthewsfunds.com.

LOGO

OPERATING EXPENSES4

 

Net Ratio: 6 months ended 6/30/07 (annualized) 5,6

    1.17 %

Net Ratio: Fiscal Year 2006 6

    1.26 %

Gross Ratio: Fiscal Year 2006

    1.27 %

PORTFOLIO TURNOVER7

 

6 months ended 6/30/07 (annualized) 5

   27.25 %

Fiscal Year 2006

    11.65 %

1

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. Source: Index data from Morgan Stanley Capital International; total return calculations performed by PFPC Inc.

2

Calculated from 2/28/98.

3

As of 6/30/07, the Lipper China Region Funds Category Average consisted of 63 funds for the three-month period, 53 funds for the YTD period, 52 funds for the one-year period, 32 funds for the three-year period, 22 funds for the five-year period, and 16 funds since 2/28/98. Lipper, Inc. fund performance does not reflect sales charges and is based on total return, including reinvestment of dividends and capital gains, for the stated periods.

4

Matthews Asian Funds do not charge 12b-1 fees.

5

Unaudited.

6

Includes management fee, administration and shareholder services fees after reimbursement, waiver or recapture of expenses by Advisor. Voluntary fee waivers by the Advisor may be discontinued at any time.

7

The lesser of fiscal year-to-date long-term purchase costs or sales proceeds divided by the average monthly market value of long-term securities.

 

800.789.ASIA [2742] www.matthewsfunds.com    39

MATTHEWS CHINA FUND

 

TOP TEN HOLDINGS1

 

    

SECTOR

    % OF NET ASSETS

China Vanke Co., Ltd.

    Financials    4.9%

China National Building Material Co., Ltd.

    Materials    3.7%

China Life Insurance Co., Ltd.

    Financials    3.6%

China Shenhua Energy Co., Ltd.

    Energy    3.3%

China Mobile, Ltd.

    Telecommunication Services    3.2%

Shanghai Zhenhua Port Machinery Co., Ltd.

    Industrials    2.9%

China Communications Construction Co., Ltd.

    Industrials    2.8%

China Merchants Bank Co., Ltd.

    Financials    2.7%

Swire Pacific, Ltd.

    Financials    2.7%

Huaneng Power International, Inc.

    Utilities    2.6%

% OF NET ASSETS IN TOP 10

       32.4%

CHINA EXPOSURE2

 

H Share

    44.5 %

SAR (Hong Kong)

    28.5 %

China-affiliated corporations

    12.5 %

B Share

    7.8 %

Overseas Limited

    4.5 %

Cash, cash equivalents and other3

    2.2 %

SECTOR ALLOCATION

 

Financials

    22.0 %

Consumer Discretionary

    18.2 %

Industrials

    14.9 %

Energy

    10.1 %

Information Technology

    9.5 %

Utilities

    7.8 %

Telecommunication Services

    5.8 %

Materials

    5.4 %

Consumer Staples

    4.1 %

Cash, cash equivalents and other3

    2.2 %

MARKET CAP EXPOSURE

 

Large cap (over $5 billion)

    64.3 %

Mid cap ($1–$5 billion)

    27.4 %

Small cap (under $1 billion)

    6.1 %

Cash, cash equivalents and other3

    2.2 %

 

NUMBER OF SECURITIES3

    NAV    FUND ASSETS   

REDEMPTION FEE

    12B-1 FEES
60    $31.20    $1.37 billion    2.00% within 90 calendar days    None

1

Holdings may combine more than one security from same issuer.

2

H Shares are mainland China companies listed on the Hong Kong exchange but incorporated in mainland China. SAR (Hong Kong) companies are companies that conduct business in Hong Kong and/or mainland China. China-affiliated corporations, also known as “Red Chips,” are mainland China companies with partial state ownership listed and incorporated in Hong Kong. B Shares are mainland Chinese companies listed on the Shanghai and Shenzhen stock exchanges, available to both Chinese and non-Chinese investors. Overseas Listed companies are companies that conduct business in mainland China but are listed in overseas markets such as Japan, Singapore, Taiwan and the United States.

3

Includes BNY Hamilton Money Fund.

 

40    MATTHEWS ASIAN FUNDS

ALL DATA IS AS OF JUNE 30, 2007, UNLESS OTHERWISE NOTED

 

PORTFOLIO MANAGER COMMENTARY continued from page 38

banks and life insurance firms—had a strong comeback in the second quarter. Conversely, only a few companies in the portfolio posted negative returns during the first half of the year. One example is Shangri-La Asia, among Asia’s biggest luxury hotel operators. The company significantly outperformed the Hong Kong market last year, but experienced a correction this year on its higher valuation.

The Fund continued to be well diversified across different sectors and market capitalizations. In recent years, large cap blue chip Chi-nese companies have recorded strong performance and in general, have outperformed the market. This is in large part a result of investors chasing big, liquid companies with blue chip status. While the Fund has significant exposure in the large cap area, we have traditionally focused our research efforts on small and mid-cap companies. We believe that over the long term, investing in the right small and mid-cap companies will provide more upside potential; our objective has been and continues to be to invest in tomorrow’s blue chips today.

Our small and mid-cap strategy is illustrated by our investment in Kingdee International Software. Kingdee is a Chinese software company that focuses on enterprise resource planning. When we first looked at the company two years ago, it had a market cap of approximately $100 million, was relatively unknown to the investment community, and was covered by very few analysts. However, we were attracted to the company’s strong R&D team and large customer base of small and medium-sized companies in China. We met with the management team and were impressed by their track record and strategy for future development. We eventually invested in Kingdee based on our conviction that it had the potential to become the leading company in China’s still infant but rapidly growing enterprise software industry. Today, the company has a market cap of more than $400 million and earnings have more than doubled in two years. While it is not yet a blue chip company in the true sense, we believe Kingdee is heading in the right direction.

The Fund did not make any significant changes during the first half of the year. We made some adjustments in the consumer sector, exiting our position in apparel retailer Giordano International to invest in its competitor Glorious Sun, which is demonstrating more solid growth. We also added two new positions to the portfolio: China Resources Enterprise, a Chinese consumer conglomerate, and Ping An Insurance, one of China’s major insurance companies. Overall, the Fund maintained its overweight positions in the consumer, financial and industrial sectors.

Going forward, we believe the market may become very volatile as Chinese equities listed in Hong Kong are trading at valuations not seen since 2001. We try to maintain a good balance between growth and valuation in the portfolio and to make certain that in our judgment, company valuations are justified by their future growth prospects.

 

800.789.ASIA [2742] www.matthewsfunds.com    41

MATTHEWS CHINA FUND

 

SCHEDULE OF INVESTMENTS (UNAUDITED)

EQUITIES: CHINA/HONG KONG: 97.8%*

 

     SHARES    VALUE

FINANCIALS: 22.0%

      

Real Estate Management & Development: 9.8%

      

China Vanke Co., Ltd. B Shares

    32,332,680    $ 66,946,246

Swire Pacific, Ltd. A Shares

    3,355,000      37,286,359

Agile Property Holdings, Ltd.

    23,546,000      30,835,768
         
        135,068,373
         

Commercial Banks: 6.2%

      

China Merchants Bank Co., Ltd. H Shares

    12,376,000      37,669,941

Bank of Communications Co., Ltd. H Shares

    15,022,000      16,003,333

BOC Hong Kong Holdings, Ltd.

    6,637,500      15,805,997

China Construction Bank Corp. H Shares

    21,695,000      14,927,243
         
        84,406,514
         

Insurance: 6.0%

      

China Life Insurance Co., Ltd. H Shares

    13,914,000      50,002,993

Ping An Insurance (Group) Co. of China, Ltd. H Shares

    4,504,500      31,828,528
         
        81,831,521
         

Total Financials

         301,306,408
         

CONSUMER DISCRETIONARY: 18.2%

      

Hotels, Restaurants & Leisure: 4.8%

      

Shangri-La Asia, Ltd.

    10,167,600      24,576,381

China Travel International Investment HK, Ltd.

    42,956,000      22,523,992

Café de Coral Holdings, Ltd.

    9,596,100      18,187,820
         
        65,288,193
         

Distributors: 3.4%

      

Li & Fung, Ltd.

    8,933,200      32,160,525

China Resources Enterprise, Ltd.

    4,034,000      15,167,741
         
        47,328,266
         

Media: 3.1%

      

Television Broadcasts, Ltd.

    2,542,000      17,880,346

Pico Far East Holdings, Ltd.

    49,062,000      15,686,387

Clear Media, Ltd.**

    7,683,000      8,351,941
         
        41,918,674
         

Automobiles: 1.9%

      

Dongfeng Motor Group Co., Ltd. H Shares

    48,968,000      26,052,138
         

Textiles, Apparel & Luxury Goods: 1.7%

      

Ports Design, Ltd.

    5,669,000      15,950,225

Glorious Sun Enterprises, Ltd.

    14,944,000      7,224,310
         
        23,174,535
         

Leisure Equipment & Products: 1.3%

      

Li Ning Co., Ltd.

    7,392,000      17,924,125
         

Diversified Consumer Services: 1.2%

      

New Oriental Education & Technology Group, Ltd. ADR**

    305,700      16,422,204
         

Specialty Retail: 0.8%

      

Belle International Holdis, Ltd.**

    10,096,000      11,142,889
         

Total Consumer Discretionary

         249,251,024
         

 

42    MATTHEWS ASIAN FUNDS

JUNE 30, 2007

 

     SHARES    VALUE

INDUSTRIALS: 14.9%

      

Transportation Infrastructure: 5.4%

      

Beijing Capital International Airport Co., Ltd. H Shares

    21,354,000    $ 30,040,669

China Merchants Holdings International Co., Ltd.

    3,940,581      19,074,968

GZI Transport, Ltd.

    22,926,000      15,979,474

COSCO Pacific, Ltd.

    3,678,000      9,642,802
         
        74,737,913
         

Machinery: 2.9%

      

Shanghai Zhenhua Port Machinery Co., Ltd. B Shares

    21,093,106      39,317,550

China High Speed Transmission Equipment Group Co., Ltd.**,***,****

    94,000      109,097
         
        39,426,647
         

Construction & Engineering: 2.8%

      

China Communications Construction Co., Ltd. H Shares

    21,517,000      38,525,425
         

Industrial Conglomerates: 1.5%

      

NWS Holdings, Ltd.

    8,033,276      20,033,876
         

Airlines: 1.2%

      

Air China, Ltd. H Shares

    20,807,900      15,886,940
         

Air Freight & Logistics: 1.1%

      

Sinotrans, Ltd. H Shares

    32,988,000      15,609,730
         

Total Industrials

         204,220,531
         

ENERGY: 10.1%

      

Oil, Gas & Consumable Fuels: 8.7%

      

China Shenhua Energy Co., Ltd. H Shares

    13,077,500      45,658,859

PetroChina Co., Ltd. H Shares

    19,094,000      28,131,123

China Petroleum & Chemical Corp. (Sinopec) H Shares

    20,640,000      22,833,027

CNOOC, Ltd.

    19,616,000      22,227,051
         
        118,850,060
         

Energy Equipment & Services: 1.4%

      

China Oilfield Services, Ltd. H Shares

    19,782,000      19,961,119
         

Total Energy

         138,811,179
         

INFORMATION TECHNOLOGY: 9.5%

      

Internet Software & Services: 3.3%

      

Sina Corp.**

    863,900      36,162,854

NetEase.com, Inc. ADR**

    565,200      9,619,704
         
        45,782,558
         

Computers & Peripherals: 2.5%

      

Lenovo Group, Ltd.

    37,842,000      22,310,674

TPV Technology, Ltd.

    16,998,000      11,760,689
         
        34,071,363
         

Software: 1.5%

      

Kingdee International Software Group Co., Ltd. †

    23,378,000      21,167,925
         

Communications Equipment: 1.4%

      

ZTE Corp. H Shares

    3,955,800      18,819,798
         

IT Services: 0.8%

      

Travelsky Technology, Ltd. H Shares

    12,178,000      10,419,329
         

Total Information Technology

         130,260,973
         

See footnotes on page 45.

 

800.789.ASIA [2742] www.matthewsfunds.com    43

MATTHEWS CHINA FUND

SCHEDULE OF INVESTMENTS (UNAUDITED) (continued)

EQUITIES: CHINA/HONG KONG (continued)

 

     SHARES    VALUE

UTILITIES: 7.8%

      

Independent Power Producers & Energy Traders: 5.2%

      

Datang International Power Generation Co., Ltd. H Shares

    22,910,000    $ 35,394,005

Huaneng Power International, Inc. H Shares

    26,174,000      29,724,923

Huaneng Power International, Inc. ADR

    140,400      6,521,580
         
        71,640,508
         

Electric Utilities: 1.6%

      

Cheung Kong Infrastructure Holdings, Ltd.

    5,698,500      21,025,390
         

Gas Utilities: 1.0%

      

Hong Kong & China Gas Co., Ltd.

    6,503,540      13,707,072
         

Total Utilities

         106,372,970
         

TELECOMMUNICATION SERVICES: 5.8%

      

Wireless Telecommunication Services: 3.2%

      

China Mobile, Ltd.

    3,870,083      41,550,730

China Mobile, Ltd. ADR

    50,500      2,721,950
         
        44,272,680
         

Diversified Telecommunication Services: 2.6%

      

China Communications Services Corp., Ltd. H Shares**

    27,964,000      20,599,632

China Telecom Corp., Ltd. H Shares

    25,028,000      14,723,859
         
        35,323,491
         

Total Telecommunication Services

         79,596,171
         

MATERIALS: 5.4%

      

Construction Materials: 3.7%

      

China National Building Material Co., Ltd. H Shares

    22,982,000      50,436,249
         

Paper & Forest Products: 1.7%

      

Nine Dragons Paper Holdings, Ltd.

    10,045,000      23,406,474
         

Total Materials

         73,842,723
         

CONSUMER STAPLES: 4.1%

      

Food Products: 1.9%

      

Tingyi (Cayman Islands) Holding Corp.

    22,181,000      25,785,923
         

Food & Staples Retailing: 1.1%

      

Lianhua Supermarket Holdings Co., Ltd. H Shares †

    10,981,000      15,644,611
         

Beverages: 1.1%

      

Tsingtao Brewery Co., Ltd. H Shares

    6,351,000      15,432,397
         

Total Consumer Staples

         56,862,931
         

TOTAL EQUITIES: CHINA/HONG KONG

(Cost $766,519,189)

         1,340,524,910
         

 

44    MATTHEWS ASIAN FUNDS

JUNE 30, 2007

 

     SHARES    VALUE

MONEY MARKET MUTUAL FUND: 1.8%*

      

BNY Hamilton Money Fund

(Cost $23,738,894)

    23,738,894    $ 23,738,894
         

TOTAL INVESTMENTS: 99.6%

(Cost $790,258,083*****)

         1,364,263,804

CASH AND OTHER ASSETS, LESS LIABILITIES: 0.4%

         5,730,567
         

NET ASSETS: 100.0%

       $ 1,369,994,371
         
* As a percentage of net assets as of June 30, 2007
** Non-income producing security
*** Fair valued under direction of the Board of Trustees
**** Illiquid security
***** Cost of investments is $790,258,083 and net unrealized appreciation consists of:

 

Gross unrealized appreciation

    $ 577,199,000  

Gross unrealized depreciation

      (3,193,279 )
        

Net unrealized appreciation

    $ 574,005,721  
        

 

† Affiliated Issuer, as defined under the Investment Company Act of 1940 (ownership of 5% or more of the outstanding voting securities of this issuer)

 

ADR American Depositary Receipt

See accompanying notes to financial statements.

 

800.789.ASIA [2742] www.matthewsfunds.com    45

MATTHEWS INDIA FUND

 

FUND DESCRIPTION

    SYMBOL: MINDX

Under normal market conditions, the Matthews India Fund, a non-diversified fund, seeks to achieve its investment objective by investing at least 80% of its total net assets, which include borrowings for investment purposes, in publicly traded common stocks, preferred stocks and convertible securities of companies located in India.

PORTFOLIO MANAGERS

 

Lead Manager: Andrew T. Foster

   Co-Manager: Sharat Shroff, CFA

PORTFOLIO MANAGER COMMENTARY

During the first half of 2007, the Matthews India Fund gained 18.25%, slightly trailing its benchmark, the Bombay Stock Exchange 100 Index, which rose 19.28%. The Fund outperformed the Lipper Emerging Markets Funds Category Average, which advanced 17.24% over the same period. The Fund’s performance, which has tracked its benchmark quite closely this year, belies the Fund’s construction: In actuality, the Fund’s composition differs substantially from that of the index.

For instance, the Fund invests much more heavily in small and medium-sized companies. At the end of June, the Fund held approximately 61% of its net assets in small and mid-cap stocks, compared to only 27% for the index (of which small caps represented less than 1%). This strategy contributed positively to the Fund’s performance in the first half of the year, as small and mid-cap stocks generally outperformed their larger peers. Fundamentals among India’s smaller and mid-sized companies continued to be strong, with earnings growth outpacing that of larger companies by a substantial margin. Conversely, the breadth of performance among large-cap stocks was very narrow; with a handful of exceptions— particularly a single heavyweight stock in the oil and gas sector—most large caps did not perform well in the first six months of 2007.

While the Fund’s exposure to smaller companies helped performance, its substantial underweight position in one particular industry detracted in an offsetting fashion. As of the end of June, the Fund had a 5% weighting in energy shares (versus 14% for the index). This sector was the best performing segment of the market during the first half of the year. Several oil and gas companies in Asia recently announced large discoveries of energy deposits and the excitement surrounding these announcements, combined with oil prices approaching $75 per barrel, pushed the shares of Indian oil companies higher.

We have for the most part avoided exposure to companies in energy or commodities. We typically find such businesses to be excessively cyclical; further, we often find better prospects for stable, long-term growth among companies whose businesses are tied to Indian households

continued on page 48

 

46    MATTHEWS ASIAN FUNDS

ALL DATA IS AS OF JUNE 30, 2007, UNLESS OTHERWISE NOTED

 

PERFORMANCE AS OF JUNE 30, 2007

 

Fund Inception: 10/31/05

    3 MO     YTD     1 YR    

Average Annual

Total Returns
SINCE
INCEPTION

  

Matthews India Fund

    23.53 %   18.25 %   60.12 %   43.68 %

Bombay Stock Exchange 100 Index 1

    23.77 %   19.28 %   62.08 %   54.94 %

Lipper Emerging Markets Funds Category Average 2

   14.33 %   17.24 %   45.07 %   40.31 %

All performance quoted is past performance and is no guarantee of future results. Assumes reinvestment of all dividends and/or distributions. Unusually high returns may not be sustainable. Investment return and principal value will fluctuate with changing market conditions so that shares, when redeemed, may be worth more or less than their original cost. The performance of foreign indices may be based on different exchange rates than those used by the Fund and, unlike the Fund’s NAV, is not adjusted to reflect fair value at the close of the NYSE. Current performance may be lower or higher than the return figures quoted. Returns are net of the Funds’ management fee and other operating expenses. Returns would have been lower if certain of the Funds’ fees and expenses had not been waived. For the Funds’ most recent month-end performance please call 800-789-ASIA [2742] or visit www.matthewsfunds.com.

LOGO

OPERATING EXPENSES3

 

Net Ratio: 6 months ended 6/30/07 (annualized) 4,5

    1.29 %

Net Ratio: Fiscal Year 2006 5

    1.41 %

Gross Ratio: Fiscal Year 2006

    1.41 %

PORTFOLIO TURNOVER6

 

6 months ended 6/30/07 (annualized) 4

   40.35 %

Fiscal Year 2006

    21.57 %

1

The Bombay Stock Exchange 100 Index (BSE 100) is a free float–adjusted market capitalization–weighted index of the 100 stocks listed on the Bombay Stock Exchange. It is not possible to invest directly in an index. Source: Index data from Bloomberg; total return calculations performed by PFPC Inc.

2

As of 6/30/07, the Lipper Emerging Markets Funds Category Average consisted of 266 funds for the three-month period, 255 funds for the YTD period, 239 funds for the one-year period, and 213 funds since 10/31/05. Lipper, Inc. fund performance does not reflect sales charges and is based on total return, including reinvestment of dividends and capital gains for the stated periods.

3

Matthews Asian Funds do not charge 12b-1 fees.

4

Unaudited.

5

Includes management fee, administration and shareholder services fees after reimbursement, waiver or recapture of expenses by Advisor. Voluntary fee waivers by the Advisor may be discontinued at any time.

6

The lesser of fiscal year-to-date long-term purchase costs or sales proceeds divided by the average monthly market value of long-term securities.

 

800.789.ASIA [2742] www.matthewsfunds.com    47

MATTHEWS INDIA FUND

 

TOP TEN HOLDINGS1

 

    

SECTOR

    % OF NET ASSETS  

Dabur India, Ltd.

   

Consumer Staples

    4.8 %

Infosys Technologies, Ltd.

   

Information Technology

    3.7 %

UTI Bank, Ltd.

   

Financials

    3.7 %

HDFC Bank, Ltd.

   

Financials

    3.5 %

CESC, Ltd.

   

Utilities

    3.5 %

Bharti Airtel, Ltd.

   

Telecommunication Services

    3.5 %

Gail India, Ltd.

   

Utilities

    3.5 %

Glenmark Pharmaceuticals, Ltd.

   

Health Care

    3.4 %

Reliance Communications, Ltd.

   

Telecommunication Services

    3.3 %

Financial Technologies India, Ltd.

   

Information Technology

    3.2 %

% OF ASSETS IN TOP 10

       36.1 %

 

COUNTRY ALLOCATION

  

India

    99.1 %

Cash, cash equivalents and other

    0.9 %

 

SECTOR ALLOCATION

  

Financials

    15.7 %

Information Technology

    15.6 %

Industrials

    14.9 %

Consumer Discretionary

    14.6 %

Consumer Staples

    10.4 %

Health Care

    9.7 %

Utilities

    6.9 %

Telecommunication Services

    6.7 %

Energy

    4.6 %

Cash, cash equivalents and other

    0.9 %

 

MARKET CAP EXPOSURE

  

Large cap (over $5 billion)

    37.8 %

Mid cap ($1–$5 billion)

    37.0 %

Small cap (under $1 billion)

    24.3 %

Cash, cash equivalents and other

    0.9 %

 

NUMBER OF SECURITIES

   

NAV

   

FUND ASSETS

   

REDEMPTION FEE

   

12B-1 FEES

51    $18.27    $787.5 million   

2.00% within 90

calendar days

    None

1

Holdings may combine more than one security from same issuer.

PORTFOLIO MANAGER COMMENTARY continued from page 46

and related domestic consumption trends. In any case, the Fund’s underweight in oil offset the gains produced elsewhere—and thus, by coincidence, the Fund’s performance tracked closely that of the benchmark.

In a mixed blessing, the liquidity and depth of the Indian markets began to grow rapidly in recent quarters. On several prior occasions, we have commented that the lack of sufficient depth and breadth in India’s capital markets is a substantial hindrance to the country’s development. Only four years ago, Indian companies would typically raise only $1 billion to $2 billion a year from all public capital markets (i.e., equity, debt, IPOs) combined. Liquidity was also poor: last year, daily turnover on India’s various stock

 

48    MATTHEWS ASIAN FUNDS

ALL DATA IS AS OF JUNE 30, 2007, UNLESS OTHERWISE NOTED

 

exchanges averaged about $1.5 billion per day, compared to about $135 billion a day for the U.S. markets. With such limited liquidity, some investors avoided investing in the Indian market; this in turn made it more difficult for companies to raise capital in the first place—a classic “chicken and egg” problem. Without the ability to raise substantial long-term capital, Indian companies will struggle to fulfill their growth prospects.

Happily, conditions improved substantially during the last two quarters. Turnover in the stock market now averages roughly $4 billion a day, which is much more commensurate with the size of India’s stock markets (now capitalized at over $1 trillion). Issuance has picked up dramatically as well; so much so that markets may struggle to digest the sheer volume of activity. The largest IPO in the country’s history took place during the second quarter and raised over $2 billion. Corporate India is now raising somewhere between $20 billion and $30 billion per year in equity and debt markets.

While these developments are positive, and will do much to shore up corporate balance sheets, some substantial questions hang over the market. Indian companies, now flush with more cash after market offerings, are diverting an increasing degree of the proceeds to overseas markets for acquisition purposes. Corporate India has become far more aggressive about building global platforms for their businesses, with a number of major acquisitions concluded in the first half of the year, and even more rumored for the next six months. Under these circumstances, it is possible that the amount of outbound investment from Indian companies may meet or even exceed the capital that is entering the country. Thus, even as India has begun to raise more capital domestically, much of it is being diverted overseas. A fundamental question lingers: where is the capital that will sustain the growth of the domestic market? This question is particularly germane at the moment, as capital expenditures in the country are beginning to rise sharply. Though India’s corporate balance sheets are largely unleveraged, India’s capital markets may remain tight.

A final note on India’s markets: the rupee strengthened sharply relative to the dollar during the first half of the year, with its value rising about 9%. This is notable in that the rupee’s value has typically been closely managed by India’s central bank, the Reserve Bank of India (RBI). The rationale behind the RBI’s tacit willingness to allow the currency to strengthen is unknown. Ostensibly, the RBI might have sought to reduce inflationary pressures (which had been running rampant) and to simultaneously encourage market forces to set the value of the currency (versus a high degree of government intervention). This is a bold move in the Asian context, where many countries directly manage the value of their currencies so as to protect their export industries. While a move like the RBI’s can be politically painful, it often encourages better growth in the economy over the medium term, as domestic industries enjoy greater pricing power. Whatever the rationale for the RBI’s decision to allow the currency to trade more freely, we welcome it, and hope the benign neglect continues.

 

800.789.ASIA [2742] www.matthewsfunds.com    49

MATTHEWS INDIA FUND

 

SCHEDULE OF INVESTMENTS (UNAUDITED)

EQUITIES: INDIA: 93.7%*

 

     SHARES    VALUE

INFORMATION TECHNOLOGY: 15.6%

IT Services: 9.4%

Infosys Technologies, Ltd.

    620,091    $ 29,386,723

Wipro, Ltd.

    1,422,435      18,117,220

HCL-Infosystems, Ltd.

    3,318,185      15,484,320

Rolta India, Ltd.

    974,495      11,187,361
         
        74,175,624
         

Software: 3.2%

Financial Technologies (India), Ltd.

    337,355      25,000,156
         

Internet Software & Services: 3.0%

Sify, Ltd. ADR**

    1,629,300      14,370,426

Info Edge India, Ltd.**

    476,727      9,132,827
         
        23,503,253
         

Total Information Technology

         122,679,033
         

INDUSTRIALS: 14.9%

Machinery: 6.6%

Ashok Leyland, Ltd.

    24,586,277      22,861,825

Jain Irrigation Systems, Ltd.

    1,596,590      18,852,745

Tata Motors, Ltd.

    443,538      7,302,768

Tata Motors, Ltd. ADR

    191,100      3,137,862
         
        52,155,200
         

Industrial Conglomerates: 3.3%

Siemens India, Ltd.

    488,707      16,738,260

MAX India, Ltd.**

    1,528,880      9,128,959
         
        25,867,219
         

Construction & Engineering: 2.6%

Larsen & Toubro, Ltd.

    373,830      20,186,177
         

Building Products: 1.5%

Sintex Industries, Ltd.

    2,016,834      11,784,890
         

Air Freight & Logistics: 0.9%

Gati, Ltd.

    3,046,428      7,267,121
         

Total Industrials

         117,260,607
         

FINANCIALS: 13.1%

Commercial Banks: 10.2%

UTI Bank, Ltd.

    1,934,200      28,771,849

HDFC Bank, Ltd.

    983,033      27,694,217

Corporation Bank

    2,954,331      23,646,261
         
        80,112,327
         

Real Estate Management & Development: 1.5%

Unitech, Ltd.

    935,000      11,599,926
         

Capital Markets: 1.4%

IL&FS Investsmart, Ltd.

    2,241,495      11,343,765
         

Total Financials

         103,056,018
         

CONSUMER DISCRETIONARY: 12.7%

Media: 6.2%

SunTV Network, Ltd.

    226,954      8,887,475

Television Eighteen India, Ltd.

    384,860      8,519,773

HT Media, Ltd.

    1,423,362      8,273,368

Zee Entertainment Enterprises, Ltd.

    1,003,908      7,332,314

Wire and Wireless India, Ltd.**

    3,020,454      4,711,923

Inox Leisure, Ltd.**

    1,206,527      3,976,307

Dish TV India, Ltd.**

    1,492,997      3,913,592

PVR, Ltd.

    702,251      3,600,535
         
        49,215,287
         

Household Durables: 2.1%

Voltas, Ltd.

    6,036,750      16,498,917
         

Automobiles: 1.9%

Hero Honda Motors, Ltd.

    596,007      10,141,124

Mahindra & Mahindra, Ltd.

    257,500      4,574,650
         
        14,715,774
         

Textiles, Apparel & Luxury Goods: 1.3%

Titan Industries, Ltd.

    304,589      10,038,978
         

Hotels, Restaurants & Leisure: 1.2%

Indian Hotels Co., Ltd.

    2,643,200      9,798,769
         

Total Consumer Discretionary

         100,267,725
         

HEALTH CARE: 9.7%

Pharmaceuticals: 9.7%

Glenmark Pharmaceuticals, Ltd.

    1,654,285      26,705,090

Sun Pharmaceutical Industries, Ltd.

    943,325      23,765,625

Cipla, Ltd.

    4,414,657      22,574,889

Sun Pharma Advanced Research Co., Ltd.**,***,****

    943,325      3,112,822
         

Total Health Care

         76,158,426
         

 

50    MATTHEWS ASIAN FUNDS

JUNE 30, 2007

 

     SHARES    VALUE

CONSUMER STAPLES: 9.5%

Personal Products: 6.3%

Dabur India, Ltd.

    14,903,857    $ 37,657,822

Marico, Ltd.

    8,824,720      12,010,551
         
        49,668,373
         

Household Products: 2.6%

Hindustan Unilever, Ltd.

    4,412,269      20,443,531
         

Beverages: 0.6%

Radico Khaitan, Ltd.

    1,267,000      4,332,794
         

Total Consumer Staples

         74,444,698
         

UTILITIES: 6.9%

Electric Utilities: 3.5%

CESC, Ltd.

    2,956,117      27,487,785
         

Gas Utilities: 3.4%

Gail India, Ltd.

    3,566,501      27,187,944
         

Total Utilities

         54,675,729
         

TELECOMMUNICATION SERVICES: 6.7%

Wireless Telecommunication Services: 6.7%

Bharti Airtel, Ltd.**

    1,334,191      27,399,999

Reliance Communications, Ltd.**

    2,024,755      25,739,085
         

Total Telecommunication Services

         53,139,084
         

ENERGY: 4.6%

Oil, Gas & Consumable Fuels: 4.6%

Reliance Industries, Ltd.

    478,371      19,985,108

Chennai Petroleum Corp., Ltd.

    2,467,744      16,180,835
         

Total Energy

         36,165,943
         

TOTAL EQUITIES: INDIA

         737,847,263

(Cost $544,037,949)

      
         

INTERNATIONAL DOLLAR BONDS: 5.4%*

 

    

FACE

AMOUNT

     

FINANCIALS: 2.6%

Thrifts & Mortgage Finance: 2.6%

Housing Development Finance Corp., Cnv.

      

0.000%, 09/27/10

    $ 13,300,000      20,914,250
         

Total Financials

         20,914,250
         

CONSUMER DISCRETIONARY: 1.9%

Automobiles: 1.9%

Mahindra & Mahindra, Ltd., Cnv.

      

0.000%, 04/14/11

      13,000,000      14,625,000
         

Total Consumer Discretionary

         14,625,000
         

CONSUMER STAPLES: 0.9%

Beverages: 0.9%

Radico Khaitan, Ltd., Cnv.

      

3.500%, 07/27/11

      6,000,000      6,930,000
         

Total Consumer Staples

         6,930,000
         

TOTAL INTERNATIONAL DOLLAR BONDS

      42,469,250

(Cost $37,154,508)

      
         

TOTAL INVESTMENTS: 99.1%

      780,316,513

(Cost $581,192,457*****)

      

CASH AND OTHER ASSETS, LESS LIABILITIES: 0.9%

      7,232,907
         

NET ASSETS: 100.0%

       $ 787,549,420
         
*   As a percentage of net assets as of June 30, 2007   
**   Non–income producing security   
***   Fair valued under direction of the Board of Trustees   
****   Illiquid security   
*****   Cost of investments is $581,192,457 and net unrealized appreciation consists of:   

Gross unrealized appreciation

    $ 209,915,198  

Gross unrealized depreciation

      (10,791,142 )
        

Net unrealized appreciation

    $ 199,124,056  
        

ADR

   American Depositary Receipt   

Cnv.

   Convertible   

See accompanying notes to financial statements.

 

800.789.ASIA [2742] www.matthewsfunds.com    51

MATTHEWS JAPAN FUND

 

FUND DESCRIPTION

    SYMBOL: MJFOX

Under normal market conditions, the Matthews Japan Fund seeks to achieve its investment objective by investing at least 80% of its total net assets, which include borrowings for investment purposes, in the common and preferred stocks of companies located in Japan.

 

PORTFOLIO MANAGERS

    Note: Managers shown reflect changes effective April 30, 2007.

Lead Managers: David Ishibashi and Taizo Ishida

PORTFOLIO MANAGER COMMENTARY

During the first six months of 2007, the Matthews Japan Fund was down –2.31%. In comparison, over the same period, the MSCI Japan Index rose 2.89%, the TOPIX Index increased 2.57% and the Lipper Japanese Funds Category Average gained 1.31%.

The beginning of 2007 brought not only the beginning of the fifth year of the Japanese economic recovery, but also the return of hope and optimism, although muted. The economy was doing well, and many signs indicated that it would continue to do so. The annualized GDP growth figures for the fourth quarter of 2006 and first quarter of 2007 were an impressive 5.5% and 3.3%, respectively. Following the release of these strong GDP figures, the Bank of Japan (BOJ) raised the benchmark interest rate to 0.5%. However, expectations of any further rate hike were quelled when central bank Governor Toshihiko Fukui indicated that the BOJ “will maintain an accommodative monetary environment by holding interest rates as low as possible to support economic growth.”

Interest in the BOJ rate policy led the market to focus on the ongoing rise in Japanese Government Bond (JGB) yields, and paradoxically the continued weakness in the yen. The 10-year JGB yield reached as high as 1.974% and the yen traded close to its 2002 low against the U.S. dollar. The markets reacted positively, and the Nikkei 225 Index surpassed 18,000 for the first time in more than six years, while the TOPIX Index advanced to 1,802.90, its first close above 1,800 since November 1991.

Although we have remained optimistic about the Japanese economy since the beginning of 2007, and continue to be invested in companies that are participating in the normalization of the economy, the Fund’s results have been to the contrary. While the market has seen occasional surges of both activity and appreciation in economically sensitive sectors, these market gains were not sustained. Perhaps the biggest influence on the outcome of the Japanese stock markets is the continued weakness of the yen. Even

 

continued on page 55

 

52    MATTHEWS ASIAN FUNDS

ALL DATA IS AS OF JUNE 30, 2007, UNLESS OTHERWISE NOTED

 

PERFORMANCE AS OF JUNE 30, 2007

 

      3 MO     YTD     1 YR     Average Annual Total Returns  

Fund Inception: 12/31/98

          3 YRS     5 YRS    

SINCE

INCEPTION

  

Matthews Japan Fund

    –3.21 %   –2.31 %   –6.38 %   2.39 %   10.37 %   8.17 %

MSCI Japan Index1

    –0.64 %   2.89 %   7.31 %   12.89 %   12.49 %   5.72 %

TOPIX2

    –1.14 %   2.57 %   4.88 %   10.83 %   12.03 %   6.01 %

Lipper Japanese Funds Category Average3

   0.09 %   1.31 %   3.19 %   9.56 %   10.20 %   5.60 %

All performance quoted is past performance and is no guarantee of future results. Assumes reinvestment of all dividends and/or distributions. Unusually high returns may not be sustainable. Investment return and principal value will fluctuate with changing market conditions so that shares, when redeemed, may be worth more or less than their original cost. The performance of foreign indices may be based on different exchange rates than those used by the Fund and, unlike the Fund’s NAV, is not adjusted to reflect fair value at the close of the NYSE. Current performance may be lower or higher than the return figures quoted. Returns are net of the Funds’ management fee and other operating expenses. Returns would have been lower if certain of the Funds’ fees and expenses had not been waived. For the Funds’ most recent month-end performance please call 800-789-ASIA [2742] or visit www.matthewsfunds.com.

LOGO

 

OPERATING EXPENSES4

  

Net Ratio: 6 months ended 6/30/07 (annualized)5,6

    1.24 %

Net Ratio: Fiscal Year 20066

    1.24 %

Gross Ratio: Fiscal Year 2006

    1.25 %

PORTFOLIO TURNOVER7

  

6 months ended 6/30/07 (annualized)5

    48.26 %

Fiscal Year 2006

    59.95 %

1

The MSCI Japan Index is a free float–adjusted market capitalization–weighted index of Japanese equities listed in Japan. It is not possible to invest directly in an index. Source: Index data from Morgan Stanley Capital International; total return calculations performed by PFPC Inc.

2

The Tokyo Stock Price Index (TOPIX) is a capitalization-weighted index of all companies listed on the First Section of the Tokyo Stock Exchange. It is not possible to invest directly in an index. Source: Index data from Bloomberg; total return calculations performed by PFPC Inc.

3

As of 6/30/07, the Lipper Japanese Funds Category Average consisted of 60 funds for the three-month period, 55 funds for the YTD period, 53 funds for the one-year period, 41 funds for the three-year period, 36 funds for the five-year period, and 28 funds since 12/31/98. Lipper, Inc. fund performance does not reflect sales charges and is based on total return, including reinvestment of dividends and capital gains, for the stated periods.

4

Matthews Asian Funds do not charge 12b-1 fees.

5

Unaudited.

6

Includes management fee, administration and shareholder services fees after reimbursement, waiver or recapture of expenses by Advisor. Voluntary fee waivers by the Advisor may be discontinued at any time.

7

The lesser of fiscal year-to-date long-term purchase costs or sales proceeds divided by the average monthly market value of long-term securities.

 

800.789.ASIA [2742] www.matthewsfunds.com    53

MATTHEWS JAPAN FUND

 

TOP TEN HOLDINGS1

      
    

SECTOR

    % OF NET ASSETS  

Sony Corp.

   

Consumer Discretionary

    3.1 %

Nintendo Co., Ltd.

   

Information Technology

    3.1 %

Mizuho Financial Group, Inc.

   

Financials

    3.0 %

Toyota Motor Corp.

   

Consumer Discretionary

    2.9 %

The Sumitomo Trust & Banking Co., Ltd.

   

Financials

    2.9 %

Keyence Corp.

   

Information Technology

    2.7 %

Sysmex Corp.

   

Health Care

    2.6 %

Nitto Denko Corp.

   

Materials

    2.6 %

The Joyo Bank, Ltd.

   

Financials

    2.6 %

The Fuji Fire & Marine Insurance Co., Ltd.

   

Financials

    2.4 %

% OF ASSETS IN TOP 10

       27.9 %

 

COUNTRY ALLOCATION

  

Japan

    99.4 %

Cash, cash equivalents and other2

    0.6 %

 

SECTOR ALLOCATION

  

Financials

    34.5 %

Information Technology

    20.7 %

Consumer Discretionary

    19.1 %

Health Care

    7.9 %

Industrials

    6.8 %

Consumer Staples

    6.1 %

Materials

    3.6 %

Telecommunication Services

    0.7 %

Cash, cash equivalents and other2

   0.6 %

 

MARKET CAP EXPOSURE

  

Large cap (over $5 billion)

    52.8 %

Mid cap ($1–$5 billion)

    31.1 %

Small cap (under $1 billion)

    15.5 %

Cash, cash equivalents and other2

    0.6 %

 

NUMBER OF SECURITIES2

  

NAV

  

FUND ASSETS

  

REDEMPTION FEE

  

12B-1 FEES

62   $16.89   $277.3 million  

2.00% within 90

calendar days

   None

1

Holdings may combine more than one security from same issuer.

2

Includes BNY Hamilton Money Fund.

 

54    MATTHEWS ASIAN FUNDS

ALL DATA IS AS OF JUNE 30, 2007, UNLESS OTHERWISE NOTED

PORTFOLIO MANAGER COMMENTARY continued from page 52

 

though the BOJ has raised interest rates twice in the past 12 months, the net effect on diminishing the so-called “carry trade” has been largely ineffective. In fact, the continued waffling of the Central Bank has only increased Japanese domestic investors’ demand and appetite for overseas bonds and higher yielding stocks.

The Fund lagged its benchmark due to its underweight allocation in the industrials and materials sectors and overweight in financials. Industrials and materials stocks, given their cyclical nature, remain underrepresented in the Fund. The Fund has remained overweight in financial and real estate–related names based on our belief that the rising interest rate environment would not only be reflationary, but also lead to an overall strengthening of the yen. However, this has yet to happen, and has had a negative impact on the Fund’s overall performance. We believe that as interest rates rise and reflation continues, it will be the financial companies—which include real estate and money management advisory—that will ultimately benefit from rising asset values. On a positive note, the Fund’s overweight positions in health care and consumer staples contributed positively to performance.

For the next three to six months, we believe the market will closely watch real estate and consumption. Starting with real estate, Japan’s annual Land Price Survey reported that real estate prices rose nationwide for the first time in 16 years. Most notably, commercial prices in the country’s three major cities were up over 8.9% from the prior year. After 15 years, the wealth effect is beginning to gain traction and consumption should begin to increase as well. Japanese companies continued to report record profits and total employee compensation is slated to rise. However, the Fund will tread carefully in consumption oriented issues, and will seek areas of sustainable growth.

The Fund’s overall strategy is to have a more balanced representation of the real Japanese economy, which in our view should capture future growth opportunities. For this reason, the Fund’s exposure to smaller companies has been intentionally high, compared to the major Japanese indices. We believe that the relative underperformance of smaller cap stocks should end soon, as the negative memories associated with the Livedoor and Murakami Fund scandals begin to fade.

We consider the valuation and growth prospects of Japanese companies to be more compelling than ever, and are excited about the investment opportunities.

 

800.789.ASIA [2742] www.matthewsfunds.com    55

MATTHEWS JAPAN FUND

 

SCHEDULE OF INVESTMENTS (UNAUDITED)

EQUITIES: JAPAN: 99.4%*

 

     SHARES    VALUE

FINANCIALS: 34.5%

Commercial Banks: 13.4%

Mizuho Financial Group, Inc.

    1,200    $ 8,313,503

The Sumitomo Trust & Banking Co., Ltd.

    839,000      8,006,700

The Joyo Bank, Ltd.

    1,149,000      7,148,296

The Chiba Bank, Ltd.

    665,000      5,908,711

The Tokyo Star Bank, Ltd.

    1,529      4,768,617

Mitsubishi UFJ Financial Group, Inc.

    264      2,916,061
         
        37,061,888
         

Real Estate Management & Development: 9.6%

Daibiru Corp.

    352,700      4,898,412

Funai Zaisan Consultants Co., Ltd.

    636      3,729,478

JOINT Corp.

    115,100      3,617,762

Creed Corp.

    1,407      3,393,941

Sumitomo Realty & Development Co., Ltd.

    91,000      2,971,127

Kenedix, Inc.

    1,574      2,940,264

Mitsubishi Estate Co., Ltd.

    97,000      2,639,188

Shoei Co., Ltd.

    115,280      2,420,295
         
        26,610,467
         

Capital Markets: 5.3%

Ichiyoshi Securities Co., Ltd.

    358,200      5,190,082

Monex Beans Holdings, Inc.

    4,861      4,066,461

Nomura Holdings, Inc.

    148,000      2,884,873

GCA Co., Ltd.

    472      2,721,787
         
        14,863,203
         

Insurance: 3.5%

The Fuji Fire & Marine Insurance Co., Ltd.

    1,686,000      6,750,847

T&D Holdings, Inc.

    42,145      2,851,312
         
        9,602,159
         

Real Estate Investment Trusts: 1.7%

Japan Logistics Fund, Inc. REIT

    511      4,772,792
         

Consumer Finance: 1.0%

ORIX Corp.

    10,800      2,846,376
         

Total Financials

         95,756,885
         

INFORMATION TECHNOLOGY: 20.7%

Electronic Equipment & Instruments: 9.1%

Keyence Corp.

    34,370      7,517,434

Murata Manufacturing Co., Ltd.

    69,800      5,266,534

Horiba, Ltd.

    114,300      4,688,041

Hoya Corp.

    134,900      4,481,145

Nidec Corp.

    40,700      2,393,243

KYOCERA Corp.

    6,900      736,374
         
        25,082,771
         

Software: 3.1%

Nintendo Co., Ltd.

    23,315      8,540,154
         

IT Services: 3.0%

Otsuka Corp.

    48,000      4,565,117

Nomura Research Institute, Ltd.

    130,100      3,835,639
         
        8,400,756
         

Office Electronics: 2.3%

Canon, Inc. ADR

    109,550      6,424,012
         

Computers & Peripherals: 1.4%

Melco Holdings, Inc.

    175,800      3,733,742
         

Internet Software & Services: 1.0%

Yahoo! Japan Corp.

    8,478      2,881,659
         

Semiconductors & Semiconductor Equipment: 0.8%

Sumco Corp.

    44,100      2,217,088
         

Total Information Technology

         57,280,182
         

CONSUMER DISCRETIONARY: 19.1%

Household Durables: 7.2%

Sony Corp. ADR

    166,800      8,568,516

Sekisui House, Ltd.

    446,000      5,958,741

Makita Corp.

    123,900      5,514,493
         
        20,041,750
         

Automobiles: 4.6%

Toyota Motor Corp. ADR

    64,300      8,094,084

Honda Motor Co., Ltd. ADR

    128,900      4,677,781
         
        12,771,865
         

Specialty Retail: 4.2%

Nitori Co., Ltd.

    118,400      5,913,990

Point, Inc.

    93,680      5,561,834
         
        11,475,824
         

 

56    MATTHEWS ASIAN FUNDS

JUNE 30, 2007

 

     SHARES    VALUE

Diversified Consumer Services: 2.1%

Benesse Corp.

    199,000    $ 5,769,990
         

Auto Components: 1.0%

Takata Corp.

    80,800      2,821,848
         

Total Consumer Discretionary

         52,881,277
         

HEALTH CARE: 7.9%

Health Care Equipment & Supplies: 5.8%

Sysmex Corp.

    197,900      7,313,259

Nakanishi, Inc.

    46,000      5,749,766

Terumo Corp.

    73,200      2,829,905
         
        15,892,930
         

Pharmaceuticals: 2.1%

Takeda Pharmaceutical Co., Ltd.

    57,900      3,743,220

ROHTO Pharmaceutical Co., Ltd.

    212,000      2,141,953
         
        5,885,173
         

Total Health Care

         21,778,103
         

INDUSTRIALS: 6.8%

Commercial Services & Supplies: 5.3%

PRONEXUS, Inc.

    570,800      4,955,819

Park24 Co., Ltd.

    388,800      3,915,630

Daiseki Co., Ltd.

    146,300      3,059,675

Secom Co., Ltd.

    59,100      2,788,800
         
        14,719,924
         

Machinery: 1.0%

Mitsubishi Heavy Industries, Ltd.

    457,000      2,935,935
         

Trading Companies & Distributors: 0.5%

Mitsubishi Corp.

    50,500      1,324,792
         

Total Industrials

         18,980,651
         

CONSUMER STAPLES: 6.1%

Beverages: 2.3%

Ito En, Ltd.

    192,700      6,338,558
         

Food Products: 2.2%

Unicharm Petcare Corp.

    151,200      6,103,261
         

Household Products: 1.6%

Pigeon Corp.

    277,900      4,509,598
         

Total Consumer Staples

         16,951,417
         

MATERIALS: 3.6%

Chemicals: 3.6%

Nitto Denko Corp.

    143,700      7,259,403

Nippon Shokubai Co., Ltd.

    308,000      2,739,168
         

Total Materials

         9,998,571
         

TELECOMMUNICATION SERVICES: 0.7%

Wireless Telecommunication Services: 0.7%

KDDI Corp.

    278      2,061,433
         

Total Telecommunication Services

      2,061,433
         

TOTAL EQUITIES: JAPAN

         275,688,519

(Cost $264,083,507)

   
         

MONEY MARKET MUTUAL FUND: 0.3%*

BNY Hamilton Money Fund

    751,715      751,715

(Cost $751,715)

      
         

TOTAL INVESTMENTS: 99.7%

         276,440,234

(Cost $264,835,222**)

      

CASH AND OTHER ASSETS, LESS LIABILITIES: 0.3%

      884,021
         

NET ASSETS: 100.0%

       $ 277,324,255
         
* As a percentage of net assets as of June 30, 2007
** Cost of investments is $264,835,222 and net unrealized appreciation consists of:

 

Gross unrealized appreciation

    $ 34,425,237  

Gross unrealized depreciation

      (22,820,225 )
        

Net unrealized appreciation

    $ 11,605,012  
        
ADR  

American Depositary Receipt

REIT  

Real Estate Investment Trust

See accompanying notes to financial statements.

 

800.789.ASIA [2742] www.matthewsfunds.com    57

MATTHEWS KOREA FUND

 

FUND DESCRIPTION

    SYMBOL: MAKOX

Under normal market conditions, the Matthews Korea Fund, a non-diversified fund, seeks to achieve its investment objective by investing at least 80% of its total net assets, which include borrowings for investment purposes, in the common and preferred stocks of companies located in South Korea.

PORTFOLIO MANAGERS

Lead Managers: G. Paul Matthews and Mark W. Headley

Co-Manager: J. Michael Oh

PORTFOLIO MANAGER COMMENTARY

For the six-month period ended June 30, 2007, the Matthews Korea Fund gained 12.84%, underperforming its benchmark, the Korea Composite Stock Price Index (KOSPI), which gained 22.67% and the Lipper Pacific ex-Japan Funds Category Average, which was up 20.39%.

After a slight decline in the first quarter of the year, the Korean equity market performed strongly in the second quarter. Throughout the first half of the year, domestic interest in the equity market from both institutional and retail investors improved, while foreign investors were net sellers of Korean equities. Despite the won’s continuing strength, exports continued to show stronger-than-expected growth, mainly on the back of robust overseas orders for ships, autos, electronic goods and components. Domestic sentiment remained weak during the first half of the year, partly due to limited corporate spending in the market. Korean corporations are still investing more overseas than at home as a result of domestic investment restrictions set by the current administration.

The U.S. and South Korea reached an initial agreement on a free-trade accord on April 2, 2007, which could impact as much as $29 billion in trade between the two countries each year. If the agreement is ratified, it would be the largest for the U.S. since the 1994 North American Free Trade Agreement. In June, the South Korean government accepted the inclusion of new labor and environmental provisions in the free-trade agreement that U.S. Congressional Democrats demanded. The U.S. and South Korean governments hope to ratify the U.S.-Korea Free Trade Agreement later this year. We believe that this agreement will have a positive long-term impact on the Korean economy, even though the short-term impact could be mixed.

The Fund underperformed the KOSPI during the first half of the year primarily as a result of its underweight positions in the shipbuilding, steel and energy industries. The Fund has historically avoided these industries given their highly cyclical, commodity-oriented nature, as we believe

 

continued on page 61

 

58    MATTHEWS ASIAN FUNDS

ALL DATA IS AS OF JUNE 30, 2007, UNLESS OTHERWISE NOTED

 

PERFORMANCE AS OF JUNE 30, 2007

               
                       Average Annual Total Returns  

Fund Inception: 1/3/95

    3 MO     YTD     1 YR     3 YRS     5 YRS     10 YRS     SINCE
INCEPTION		  

Matthews Korea Fund

    18.35 %   12.84 %   29.12 %   34.53 %   23.78 %   14.24 %   7.58 %

KOSPI1

    22.39 %   22.67 %   38.78 %   40.77 %   25.26 %   8.80 %   3.53 %

Lipper Pacific ex-Japan Funds Category Average2

   16.09 %   20.39 %   46.62 %   33.48 %   23.25 %   7.69 %   8.79 %3

All performance quoted is past performance and is no guarantee of future results. Assumes reinvestment of all dividends and/or distributions. Unusually high returns may not be sustainable. Investment return and principal value will fluctuate with changing market conditions so that shares, when redeemed, may be worth more or less than their original cost. The performance of foreign indices may be based on different exchange rates than those used by the Fund and, unlike the Fund’s NAV, is not adjusted to reflect fair value at the close of the NYSE. Current performance may be lower or higher than the return figures quoted. Returns are net of the Funds’ management fee and other operating expenses. Returns would have been lower if certain of the Funds’ fees and expenses had not been waived. For the Funds’ most recent month-end performance please call 800-789-ASIA [2742] or visit www.matthewsfunds.com.

LOGO

 

OPERATING EXPENSES4

  

Net Ratio: 6 months ended 6/30/07 (annualized)5,6

    1.25 %

Net Ratio: Fiscal Year 20066

    1.28 %

Gross Ratio: Fiscal Year 2006

    1.30 %

PORTFOLIO TURNOVER7

  

6 months ended 6/30/07 (annualized)5

    26.21 %

Fiscal Year 2006

    25.82 %

1

The Korea Composite Stock Price Index (KOSPI) is a capitalization-weighted index of all common stocks listed on the Korea Stock Exchange. It is not possible to invest directly in an index. Source: Index data from Bloomberg; total return calculations performed by PFPC Inc.

2

As of 6/30/07, the Lipper Pacific ex-Japan Funds Category Average consisted of 46 funds for the three-month, YTD and one-year periods; 44 funds for the three-year period; 41 funds for the five-year period; 22 funds for the 10-year period; and 12 funds since 12/31/94. Lipper, Inc. fund performance does not reflect sales charges and is based on total return, including reinvestment of dividends and capital gains, for the stated periods.

3

Calculated from 12/31/94.

4

Matthews Asian Funds do not charge 12b-1 fees.

5

Unaudited.

6

Includes management fee, administration and shareholder services fees after reimbursement, waiver or recapture of expenses by Advisor. Voluntary fee waivers by the Advisor may be discontinued at any time.

7

The lesser of fiscal year-to-date long-term purchase costs or sales proceeds divided by the average monthly market value of long-term securities.

 

800.789.ASIA [2742] www.matthewsfunds.com    59

MATTHEWS KOREA FUND

 

TOP TEN HOLDINGS1

      
    

SECTOR

    % OF NET ASSETS  

Samsung Electronics Co., Ltd.

   

Information Technology

    8.4 %

Kookmin Bank

   

Financials

    5.4 %

SK Telecom Co., Ltd.

   

Telecommunication Services

    5.2 %

NHN Corp.

   

Information Technology

    4.5 %

Samsung Securities Co., Ltd.

   

Financials

    4.5 %

Hana Financial Group, Inc.

   

Financials

    4.4 %

Amorepacific Corp.

   

Consumer Staples

    4.2 %

Shinhan Financial Group Co., Ltd.

   

Financials

    3.6 %

Hanmi Pharmaceutical Co., Ltd.

   

Health Care

    3.2 %

Samsung Fire & Marine Insurance Co., Ltd.

   

Financials

    3.1 %

% OF ASSETS IN TOP 10

       46.5 %

 

COUNTRY ALLOCATION

  

South Korea

    99.7 %

Cash, cash equivalents and other2

    0.3 %

SECTOR ALLOCATION

  

Financials

    24.3 %

Information Technology

    15.9 %

Consumer Discretionary

    14.0 %

Health Care

    11.7 %

Industrials

    11.5 %

Consumer Staples

    11.4 %

Telecommunication Services

    7.2 %

Energy

    2.5 %

Materials

    1.2 %

Cash, cash equivalents and other2

    0.3 %

MARKET CAP EXPOSURE

  

Large cap (over $5 billion)

    49.1 %

Mid cap ($1–$5 billion)

    32.6 %

Small cap (under $1 billion)

    18.0 %

Cash, cash equivalents and other2

    0.3 %

 

NUMBER OF SECURITIES2

  

NAV

  

FUND ASSETS

  

REDEMPTION FEE

  

12B-1 FEES

44   $7.03   $240.5 million  

2.00% within 90

calendar days

   None

1

Holdings may combine more than one security from same issuer.

2

Includes BNY Hamilton Money Fund.

 

60    MATTHEWS ASIAN FUNDS

ALL DATA IS AS OF JUNE 30, 2007, UNLESS OTHERWISE NOTED

PORTFOLIO MANAGER COMMENTARY continued from page 58

 

forward earnings for companies in these industries are unpredictable. Additionally, the Fund’s overweight exposure in the health care sector hurt performance. The health care sector was under pressure as investors expect that the free trade agreement with the U.S. will negatively impact Korean pharmaceutical companies. The agreement is expected to increase foreign competition in the Korean pharmaceutical industry and may delay Korean generic drug makers from releasing new products.

The financial sector provided the largest contribution to Fund performance. A strong equity market drove the brokerage industry’s rally during the first quarter of the year. However, the Capital Market Consolidation Act (CMCA) was an even stronger catalyst during the second quarter. The CMCA is expected to speed up the restructuring of the domestic brokerage sector and foster the development of more sophisticated financial firms, like the U.S. investment banks. Brokerage firms are expected to benefit most from the CMCA’s reforms.

On a company basis, Kiwoom Securities was the largest contributor to Fund performance for the first half of the year. Kiwoom offers investors an online trading platform and has the largest market share among online discount brokers in Korea. Increased liquidity in the equity market and the optimism surrounding the CMCA helped the company during the six-month period. NHN, the dominant player in Korea’s Internet search, casual games and portal industry, was another strong contributor to Fund performance. NHN recorded impressive growth in the first quarter 2007 and announced a positive outlook for the remainder of the year.

Samsung Electronics was the Fund’s worst performer during the six-month period. The decline in the price of DRAM products and increased competition in the handset business contributed to the company’s poor performance. CDNetworks was the second worst performer in the Fund for the first half of the year. CDNetworks develops and provides content delivery network (CDN) services, mainly in Korea. The company has been suffering from losses at a subsidiary that provides user-created-content (UCC) online, similar to YouTube in the U.S.

The Fund remains focused on the consumer, financials and information technology sectors. Although the strong rally in the cyclical sectors—which we consciously avoid—has caused the Fund to underperform in recent periods, we continue to believe that in the long term, the consumer, financials and information technology sectors will create value for the Fund’s shareholders.

 

800.789.ASIA [2742] www.matthewsfunds.com    61

MATTHEWS KOREA FUND

 

SCHEDULE OF INVESTMENTS (UNAUDITED)

EQUITIES: SOUTH KOREA: 99.7%*

 

     SHARES    VALUE

FINANCIALS: 24.3%

Commercial Banks: 13.4%

Kookmin Bank

    130,835    $ 11,485,326

Hana Financial Group, Inc.

    215,890      10,527,515

Shinhan Financial Group Co., Ltd.

    144,242      8,774,585

Kookmin Bank ADR

    16,339      1,433,257
         
        32,220,683
         

Capital Markets: 7.6%

Samsung Securities Co., Ltd.

    133,714      10,753,856

Kiwoom.com Securities Co., Ltd.

    97,359      7,429,571

Kiwoom.com Securities Co., Ltd. Rights, expire 07/11/07***,****

    13,143      187,794
         
        18,371,221
         

Insurance: 3.1%

Samsung Fire & Marine Insurance Co., Ltd.

    38,847      7,484,728
         

Consumer Finance: 0.2%

Samsung Card Co.**

    6,800      418,076
         

Total Financials

         58,494,708
         

INFORMATION TECHNOLOGY: 15.9%

Semiconductors & Semiconductor Equipment: 8.5%

Samsung Electronics Co., Ltd.

    32,973      20,201,026

Samsung Electronics Co., Ltd., Pfd.

    676      316,469
         
        20,517,495
         

Internet Software & Services: 6.2%

NHN Corp.**

    59,694      10,887,524

CDNetworks Co., Ltd.**

    158,285      3,863,535
         
        14,751,059
         

Office Electronics: 1.2%

Sindo Ricoh Co., Ltd.

    43,800      2,873,064
         

Total Information Technology

         38,141,618
         

CONSUMER DISCRETIONARY: 14.0%

Media: 4.5%

Cheil Communications, Inc.

    20,937      6,447,558

ON*Media Corp.**

    480,790      4,454,795
         
        10,902,353
         

Automobiles: 3.3%

Hyundai Motor Co.

    71,039      5,613,300

Hyundai Motor Co., Pfd.

    49,600      2,265,649
         
        7,878,949
         

Multiline Retail: 2.5%

Hyundai Department Store Co., Ltd.

    51,820      6,113,958
         

Internet & Catalog Retail: 2.0%

GS Home Shopping, Inc.

    52,539      4,862,353
         

Auto Components: 1.7%

Hankook Tire Co., Ltd.

    222,250      3,993,451
         

Total Consumer Discretionary

         33,751,064
         

HEALTH CARE: 11.7%

Pharmaceuticals: 10.5%

Hanmi Pharmaceutical Co., Ltd.

    50,269      7,726,577

Yuhan Corp.

    33,397      6,253,917

Dong-A Pharmaceutical Co., Ltd.

    60,805      5,706,331

Daewoong Pharmaceutical Co., Ltd.

    82,623      5,643,244
         
        25,330,069
         

Health Care Equipment & Supplies: 1.2%

Osstem Implant Co., Ltd.**

    59,271      2,790,809
         

Total Health Care

         28,120,878
         

 

62    MATTHEWS ASIAN FUNDS

JUNE 30, 2007

 

     SHARES    VALUE  

INDUSTRIALS: 11.5%

 

Industrial Conglomerates: 3.9%

 

Orion Corp.

    18,490    $ 5,523,884  

Samsung Techwin Co., Ltd.

    71,910      3,790,677  
           
        9,314,561  
           

Construction & Engineering: 3.1%

      

Samsung Engineering Co., Ltd.

    41,210      4,353,625  

GS Engineering & Construction Corp.

    26,932      3,221,287  
           
        7,574,912  
           

Commercial Services & Supplies: 2.9%

      

S1 Corp.

    128,125      6,913,494  
           

Machinery: 1.6%

      

JVM Co., Ltd.

    66,063      3,932,960  
           

Total Industrials

         27,735,927  
           

CONSUMER STAPLES: 11.4%

      

Food & Staples Retailing: 4.5%

      

Shinsegae Food Co., Ltd.

    62,465      6,085,241  

Shinsegae Co., Ltd.

    7,212      4,699,490  
           
        10,784,731  
           

Personal Products: 4.1%

      

Amorepacific Corp.

    12,626      10,004,040  
           

Beverages: 1.4%

      

Hite Brewery Co., Ltd.

    26,715      3,470,044  
           

Food Products: 1.4%

      

Nong Shim Co., Ltd.

    11,511      3,276,931  
           

Total Consumer Staples

         27,535,746  
           

TELECOMMUNICATION SERVICES: 7.2%

      

Wireless Telecommunication Services: 5.2%

      

SK Telecom Co., Ltd.

    40,412      9,317,266  

SK Telecom Co., Ltd. ADR

    114,200      3,123,370  
           
        12,440,636  
           

Diversified Telecommunication Services: 2.0%

      

KT Corp.

    61,810      2,890,287  

KT Corp. ADR

    81,300      1,907,298  
           
        4,797,585  
           

Total Telecommunication Services

         17,238,221  
           

ENERGY: 2.5%

 

Oil, Gas & Consumable Fuels: 2.5%

 

GS Holdings Corp.

    122,890      5,972,572  
           

Total Energy

         5,972,572  
           

MATERIALS: 1.2%

      

Chemicals: 1.2%

      

LG Chem, Ltd.

    33,680      2,847,224  
           

Total Materials

         2,847,224  
           

TOTAL EQUITIES: SOUTH KOREA

         239,837,958  

(Cost $135,779,046)

      
           

MONEY MARKET MUTUAL FUND: 0.6%*

      

BNY Hamilton Money Fund

    1,490,560      1,490,560  

(Cost $1,490,560)

      
           

TOTAL INVESTMENTS: 100.3%

         241,328,518  

(Cost $137,269,606*****)

      

LIABILITIES IN EXCESS OF CASH AND OTHER ASSETS: –0.3%

         (817,997 )
           

NET ASSETS: 100.0%

       $ 240,510,521  
           
*   As a percentage of net assets as of June 30, 2007   

**

   Non–income producing security   

***

   Fair valued under direction of the Board of Trustees   

****

   Illiquid security   

*****

   Cost of investments is $137,269,606 and net unrealized appreciation consists of:   
Gross unrealized appreciation    $ 104,812,193  
Gross unrealized depreciation      (753,281 )
        
Net unrealized appreciation    $ 104,058,912  
        

ADR

   American Depositary Receipt   

Pfd.

   Preferred   

See accompanying notes to financial statements.

 

800.789.ASIA [2742] www.matthewsfunds.com    63

DISCLOSURE OF FUND EXPENSES (Unaudited)

We believe it is important for you to understand the impact of fees regarding your investment. All mutual funds have operating expenses. As a shareholder of a mutual fund, you incur ongoing costs, which include costs for portfolio management, administrative services, and shareholder reports (like this one), among others. Operating expenses, which are deducted from a fund’s gross income, directly reduce the investment return of the fund. A fund’s operating expenses are expressed as a percentage of its average net assets. This figure is known as the expense ratio. The following examples are intended to help you understand the ongoing fees (in dollars) of investing in your fund and to compare these costs with those of other mutual funds. The examples are based on an investment of $1,000 made at the beginning of the period shown and held for the entire period.

This table illustrates your fund’s costs in two ways:

Actual Fund Return: This section helps you to estimate the actual operating expenses, after any applicable fee waivers, that you paid over the period. The “Ending Account Value” shown is derived from the fund’s actual return for the past six month period, the “Expense Ratio” column shows the period’s annualized expense ratio, and the “Operating Expenses Paid During Period” column shows the dollar amount that would have been paid by an investor who started with $1,000 in the fund at the beginning of the period.

You may use the information here, together with your account value, to estimate the expenses that you paid over the period. To do so, simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number given for your fund in the first line under the heading entitled “Operating Expenses Paid During Period.”

Hypothetical 5% Return: This section is intended to help you compare your fund’s costs with those of other mutual funds. It assumes that the fund had an annual return of 5% before operating expenses, but that the expense ratio is unchanged. In this case, because the return used is not the fund’s actual return, the results do not apply to your investment. This example is useful in making comparisons to other mutual funds because the Securities and Exchange Commission requires all mutual funds to calculate expenses based on an assumed 5% annual return. You can assess your fund’s costs by comparing this hypothetical example with the hypothetical examples that appear in shareholder reports of other funds.

Please note that the operating expenses shown in the table are meant to highlight and help you compare your ongoing costs only and do not reflect any transactional costs such as sales charges (loads), redemption fees, or exchange fees. The Funds assess a redemption fee of 2.00% of the total redemption proceeds if you sell or exchange your shares within 90 calendar days after purchasing them. The redemption fee is paid directly to the funds and is designed to discourage frequent short-term trading and to offset transaction costs associated with such trading of Fund shares. For purposes of determining whether the redemption fee applies, the shares that have been held the longest will be redeemed first. The redemption fee does not apply to redemptions of shares held in certain omnibus accounts and retirement plans that cannot currently implement the redemption fee. While these exceptions exist, the Funds are not accepting any new accounts which cannot implement the redemption fee. In addition, the Funds are actively discussing a schedule for implementation of the fee with these providers.

For more information on this policy, please see the Funds’ prospectus.

The Matthews Asian Funds do not charge any sales loads, exchange fees, or 12b-1 fees, but these may be present in other funds to which you compare this data. Therefore, the hypothetical portions of the table are useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds.

 

64    MATTHEWS ASIAN FUNDS

JUNE 30, 2007

 

    Beginning Account
Value 1/1/07		   Ending Account
Value 6/30/07		   Expense
Ratio1		     Expenses Paid
During Period
1/1/07 – 6/30/072

Matthews Asia Pacific Fund

        

Actual Fund Return

   $ 1,000.00   $ 1,076.30   1.18 %   $ 6.11

Hypothetical 5% Return

   $ 1,000.00   $ 1,019.05   1.18 %   $ 5.94

Matthews Asia Pacific Equity Income Fund

        

Actual Fund Return

   $ 1,000.00   $ 1,108.00   1.47 %   $ 7.73

Hypothetical 5% Return

   $ 1,000.00   $ 1,017.60   1.47 %   $ 7.39

Matthews Pacific Tiger Fund

        

Actual Fund Return

   $ 1,000.00   $ 1,158.60   1.11 %   $ 5.97

Hypothetical 5% Return

   $ 1,000.00   $ 1,019.40   1.11 %   $ 5.59

Matthews Asian Growth and Income Fund

        

Actual Fund Return

   $ 1,000.00   $ 1,115.70   1.15 %   $ 6.07

Hypothetical 5% Return

   $ 1,000.00   $ 1,019.20   1.15 %   $ 5.79

Matthews Asian Technology Fund

        

Actual Fund Return

   $ 1,000.00   $ 1,114.90   1.26 %   $ 6.64

Hypothetical 5% Return

   $ 1,000.00   $ 1,018.65   1.26 %   $ 6.34

Matthews China Fund

        

Actual Fund Return

   $ 1,000.00   $ 1,291.40   1.17 %   $ 6.68

Hypothetical 5% Return

   $ 1,000.00   $ 1,019.10   1.17 %   $ 5.89

Matthews India Fund

        

Actual Fund Return

   $ 1,000.00   $ 1,182.50   1.29 %   $ 7.02

Hypothetical 5% Return

   $ 1,000.00   $ 1,018.50   1.29 %   $ 6.49

Matthews Japan Fund

        

Actual Fund Return

   $ 1,000.00   $ 976.90   1.24 %   $ 6.11

Hypothetical 5% Return

   $ 1,000.00   $ 1,018.75   1.24 %   $ 6.24

Matthews Korea Fund

        

Actual Fund Return

   $ 1,000.00   $ 1,128.40   1.25 %   $ 6.61

Hypothetical 5% Return

   $ 1,000.00   $ 1,018.72   1.25 %   $ 6.27

1

Annualized, based on the Fund’s most recent fiscal half-year expenses.

2

Operating expenses are equal to the Fund’s annualized expense ratio multiplied by the average account value over the period, multiplied by the number of days in the most recent fiscal half-year, then divided by 365.

 

800.789.ASIA [2742] www.matthewsfunds.com    65

STATEMENTS OF ASSETS AND LIABILITIES

UNAUDITED

 

    

Matthews

Asia Pacific
Fund

    Matthews Asia
Pacific Equity
Income Fund		     Matthews
Pacific Tiger
Fund
Assets:        

Investments at value (A) (Note 1-A and 4):

        

Unaffiliated issuers

    $ 470,969,793    $ 62,126,266     $ 3,382,598,200

Affiliated issuers

      —        —         260,528,480
                     

Total investments

      470,969,793      62,126,266       3,643,126,680

Cash

      —        —         1,887

Foreign currency at value (B)

      813      115,989       38,170

Dividends and interest receivable

      1,191,930      162,298       6,417,527

Receivable for securities sold

      649,856      —         —  

Receivable for capital shares sold

      350,558      1,443,591       3,292,025

Deferred organization costs (Note 1-F)

      —        26,677       —  

Prepaid expenses and other assets

      —        —         21,483
                     

Total assets

      473,162,950      63,874,821       3,652,897,772
                     

Liabilities:

        

Payable for securities purchased

      16,954      586,629       153,804

Payable for capital shares redeemed

      319,778      22,242       4,025,662

Cash overdraft

      640,520      —         —  

Foreign currency at value (B)

      —        —         —  

Distributions payable

      317      —         247

Due to Advisor (Note 2)

      276,734      107,876       2,088,915

Administration and accounting fees payable

      21,259      2,379       155,968

Administration and shareholder servicing fees payable

      84,548      7,339       653,504

Custodian fees payable

      38,666      7,181       442,057

Transfer agent fees payable

      52,101      5,861       353,039

Trustees fees payable

      —        256       —  

Accrued expenses payable

      23,886      10,419       87,463
                     

Total liabilities

      1,474,763      750,182       7,960,659
                     

Net Assets

    $ 471,688,187    $ 63,124,639     $ 3,644,937,113
                     

Shares Outstanding:

        

(shares of beneficial interest issued and outstanding, respectively, unlimited number of shares authorized with a $0.001 par value)

      25,903,765      5,335,226       132,710,703
                     

Net asset value, offering price and redemption price

    $ 18.21    $ 11.83     $ 27.47
                     

Net Assets Consist of:

        

Capital paid-in

    $ 343,711,680    $ 57,837,947     $ 2,106,793,309

Undistributed/accumulated net investment income (loss)

      2,420,509      (24,812 )     28,789,514

Undistributed/accumulated net realized gain (loss) on investments and foreign currency related transactions

      37,127,913      798,772       294,784,299

Net unrealized appreciation on investments and foreign currency related transactions

      88,428,085      4,512,732       1,214,569,991
                     

Net Assets

    $ 471,688,187    $ 63,124,639     $ 3,644,937,113
                     

(A) Investments at cost:

        

Unaffiliated issuers

    $ 382,525,452    $ 57,613,159     $ 2,222,904,703

Affiliated issuers

      —        —         205,668,601
                     

Total investments at cost

    $ 382,525,452    $ 57,613,159     $ 2,428,573,304
                     

(B) Foreign currency at cost

    $ 814    $ 116,121     $ 38,191
                     

See accompanying notes to financial statements.

 

66    MATTHEWS ASIAN FUNDS

JUNE 30, 2007

Matthews

Asian Growth
and Income Fund

    

Matthews Asian
Technology

Fund

    

Matthews

China Fund

    

Matthews

India Fund

  

Matthews

Japan Fund

    

Matthews

Korea Fund

  
$ 2,194,377,684     $ 159,404,613     $ 1,327,451,268     $ 780,316,513   $ 276,440,234     $ 241,328,518  
  27,417,004       —         36,812,536       —       —         —    
                                           
  2,221,794,688       159,404,613       1,364,263,804       780,316,513     276,440,234       241,328,518  
  —         —         513       —       —         272  
  44,609       9,344       —         7,428,907     —         —    
  2,881,185       317,919       4,113,262       932,781     793,772       69,499  
  2,689,742       —         —         —       —         —    
  1,998,392       1,014,687       4,451,677       1,931,969     1,036,521       186,046  
  —         —         —         —       —         —    
  27,546       423       26,789       17,520     10,500       14,773  
                                           
  2,229,436,162       160,746,986       1,372,856,045       790,627,690     278,281,027       241,599,108  
                                           
  318,946       1,082,024       440,570       —       —         254,916  
  1,424,089       168,343       1,096,639       522,788     589,514       554,399  
  —         —         —         1,660,268     —         —    
  —         —         630       —       109       11  
  129       —         —         —       —         —    
  1,283,192       90,150       749,237       442,092     161,403       139,322  
  97,094       6,761       55,413       32,057     12,861       9,999  
  439,269       25,688       229,148       135,649     73,114       47,335  
  181,814       15,688       96,879       182,639     10,402       28,379  
  256,458       22,380       146,724       102,777     87,371       54,226  
  —         —         2,021       —       —         —    
  —         11,133       44,413       —       21,998       —    
                                           
  4,000,991       1,422,167       2,861,674       3,078,270     956,772       1,088,587  
                                           
$ 2,225,435,171     $ 159,324,819     $ 1,369,994,371     $ 787,549,420   $ 277,324,255     $ 240,510,521  
                                           
  110,632,901       18,038,205       43,912,444       43,101,024     16,422,859       34,229,470  
                                           
$ 20.12     $ 8.83     $ 31.20     $ 18.27   $ 16.89     $ 7.03  
                                           
$ 1,528,333,208     $ 129,030,553     $ 719,145,459     $ 565,507,238   $ 256,994,099     $ 104,154,161  
  (33,455,862 )     (130,500 )     6,668,948       275,850     (541,345 )     1,792,322  
  106,106,005       (11,418,201 )     70,093,175       22,585,933     9,292,236       30,507,563  
  624,451,820       41,842,967       574,086,789       199,180,399     11,579,265       104,056,475  
                                           
$ 2,225,435,171     $ 159,324,819     $ 1,369,994,371     $ 787,549,420   $ 277,324,255     $ 240,510,521  
                                           
$ 1,561,404,923     $ 117,550,562     $ 767,669,223     $ 581,192,457   $ 264,835,222     $ 137,269,606  
  35,949,721       —         22,588,860       —       —         —    
                                           
$ 1,597,354,644     $ 117,550,562     $ 790,258,083     $ 581,192,457   $ 264,835,222     $ 137,269,606  
                                           
$ 44,305     $ 8,627     $ (630 )   $ 7,384,144   $ (109 )   $ (11 )
                                           

 

800.789.ASIA [2742] www.matthewsfunds.com    67

STATEMENTS OF OPERATIONS

UNAUDITED

 

     Matthews
Asia Pacific
Fund		     Matthews
Asia Pacific
Equity Income
Fund		     Matthews
Pacific Tiger
Fund		  

Investment Income:

       

Dividends – Unaffiliated issuers

    $ 5,545,800     $ 892,420     $ 47,427,511  

Dividends – Affiliated issuers (Note 4)

      —         —         2,139,749  

Interest

      68,887       3,830       463,738  

Foreign withholding tax

      (420,184 )     (51,502 )     (3,766,116 )
                        

Total investment income

      5,194,503       844,748       46,264,882  
                        

Expenses:

       

Investment advisory fees (Note 2)

      1,620,113       158,335       11,673,336  

Administration and accounting fees

      55,136       5,164       395,611  

Administration and shareholder servicing fees (Note 2)

      566,281       46,089       3,885,096  

Custodian fees

      85,920       20,649       876,935  

Insurance fees

      3,795       55       28,468  

Organization fees (Note 1-F )

      —         39,191       —    

Printing fees

      79,517       460       237,413  

Professional fees

      13,593       10,164       38,063  

Registration fees

      28,412       15,430       53,062  

Transfer agent fees

      297,770       40,551       1,656,366  

Trustees fees

      8,588       836       61,994  

Other expenses

      43,037       10,968       69,678  
                        

Total expenses

      2,802,162       347,892       18,976,022  

Advisory fees waived, shareholder servicing fees waived, and expenses waived or reimbursed (Note 2)

      (28,168 )     (11,997 )     (198,343 )

Net expenses

      2,773,994       335,895       18,777,679  
                        

Net Investment Income (Loss)

      2,420,509       508,853       27,487,203  
                        
Realized and Unrealized Gain (Loss) on Investments and Foreign Currency Related Transactions:       

Net realized gain (loss) on investments – Unaffiliated issuers

      34,199,372       826,465       247,611,165  

Net realized gain (loss) on investments – Affiliated issuers

      —         —         3,845,772  

Net realized capital gains tax

      (1,097,407 )     (1,340 )     (3,331,461 )

Net realized gain (loss) on foreign currency related transactions

      19,951       (26,353 )     385,818  

Net change in unrealized appreciation/depreciation on investments

      (1,531,512 )     3,487,828       229,354,768  

Net change in unrealized appreciation/depreciation on foreign currency related transactions

      (16,123 )     (454 )     17,368  
                        

Net realized and unrealized gain (loss) on investments, capital gains tax and foreign currency related transactions

      31,574,281       4,286,146       477,883,430  
                        

Net Increase (Decrease) in Net Assets from Operations

    $ 33,994,790     $ 4,794,999     $ 505,370,633  
                        

See accompanying notes to financial statements.

 

68    MATTHEWS ASIAN FUNDS

FOR THE SIX MONTHS ENDED JUNE 30, 2007

Matthews
Asian Growth
and Income Fund		     Matthews Asian
Technology
Fund		     Matthews
China Fund		    

Matthews

India Fund

    

Matthews

Japan Fund

     Matthews
Korea Fund		  
$ 30,834,953     $ 881,749     $ 13,086,948     $ 4,182,673     $ 2,051,226     $ 3,804,425  
  825,914       —         294,899       —         —         —    
  5,437,836       15,714       87,491       585,733       12,980       —    
  (1,814,103 )     (89,092 )     —         —         (142,701 )     (613,645 )
                                             
  35,284,600       808,371       13,469,338       4,768,406       1,921,505       3,190,780  
                                             
  7,267,295       508,576       4,009,787       2,414,249       986,657       758,569  
  246,290       17,260       134,683       81,929       33,683       25,807  
  2,629,272       178,993       1,416,104       856,130       372,078       265,070  
  348,906       37,772       243,690       368,763       21,574       57,146  
  17,441       1,021       6,825       5,435       2,694       2,215  
  —         —         —         —         —         —    
  149,167       21,401       96,762       91,960       51,696       36,117  
  26,657       10,970       19,100       32,463       12,093       11,554  
  35,103       19,920       53,794       33,233       29,237       22,785  
  1,382,654       115,581       803,908       518,912       242,870       170,246  
  38,430       2,694       21,229       12,793       5,235       4,030  
  35,221       21,907       62,440       118,240       30,838       26,611  
                                             
  12,176,436       936,095       6,868,322       4,534,107       1,788,655       1,380,150  
  (123,770 )     (9,319 )     (68,474 )     (41,551 )     (17,449 )     (13,556 )
                                             
  12,052,666       926,776       6,799,848       4,492,556       1,771,206       1,366,594  
                                             
  23,231,934       (118,405 )     6,669,490       275,850       150,299       1,824,186  
                                             
  106,160,298       1,689,208       85,884,665       25,843,231       4,850,087       18,112,605  
  —         —         —         —         —         —    
  —         (210,929 )     —         (1,011,651 )     —         —    
  (52,366 )     (9,160 )     6,564       593,788       (36,166 )     (88,253 )
  101,916,258       14,547,011       206,444,902       86,628,304       (12,519,255 )     5,655,394  
  (6,533 )     (13,388 )     81,088       25,925       (25,351 )     (2,566 )
                                             
  208,017,657       16,002,742       292,417,219       112,079,597       (7,730,685 )     23,677,180  
                                             
$ 231,249,591     $ 15,884,337     $ 299,086,709     $ 112,355,447     $ (7,580,386 )   $ 25,501,366  
                                             

 

800.789.ASIA [2742] www.matthewsfunds.com    69

STATEMENTS OF CHANGES IN NET ASSETS

Matthews Asia Pacific Fund

 

    Six-Month Period
Ended June 30, 2007		     Year Ended
December 31, 2006		  
    (unaudited)        

Operations:

    

Net investment income

   $ 2,420,509     $ 1,827,107  

Net realized gain on investments and foreign currency related transactions

     33,121,916       16,670,811  

Net change in unrealized appreciation/depreciation on investments and foreign currency related transactions

     (1,547,635 )     38,275,631  
               

Net increase in net assets resulting from operations

     33,994,790       56,773,549  
               

Distributions to Shareholders from:

    

Net investment income

     —         (1,833,549 )

Realized gains on investments

     —         (12,267,314 )
               

Net decrease in net assets resulting from distributions

     —         (14,100,863 )
               

Capital Share Transactions (net) (Note 1-K)

     (12,217,585 )     121,726,009  
               

Redemption Fees

     212,298       130,887  
               

Total increase in net assets

     21,989,503       164,529,582  
               

Net Assets:

    

Beginning of period

     449,698,684       285,169,102  
               

End of period (including undistributed net investment income of $2,420,509 and $0, respectively)

   $ 471,688,187     $ 449,698,684  
               

See accompanying notes to financial statements.

    
Matthews Asia Pacific Equity Income Fund    
    Six-Month Period
Ended June 30, 2007		     Period Ended
December 31, 20061		  
    (unaudited)        

Operations:

    

Net investment income

   $ 508,853     $ 28,850  

Net realized gain (loss) on investments and foreign currency related transactions

     798,772       (5,232 )

Net change in unrealized appreciation/depreciation on investments and foreign currency related transactions

     3,487,374       1,025,358  
               

Net increase in net assets resulting from operations

     4,794,999       1,048,976  
               

Distributions to Shareholders from:

    

Net investment income

     (528,818 )     (28,465 )
               

Net decrease in net assets resulting from distributions

     (528,818 )     (28,465 )
               

Capital Share Transactions (net) (Note 1-K)

     33,068,724       24,718,942  
               

Redemption Fees

     49,520       761  
               

Total increase in net assets

     37,384,425       25,740,214  
               

Net Assets:

    

Beginning of period

     25,740,214       —    
               

End of period (including accumulated net investment loss of ($24,812) and ($4,847), respectively)

   $ 63,124,639     $ 25,740,214  
               

1

The Matthews Asia Pacific Equity Income Fund commenced operations on October 31, 2006.

See accompanying notes to financial statements.

 

70    MATTHEWS ASIAN FUNDS

JUNE 30, 2007

 

Matthews Pacific Tiger Fund

 

    Six-Month Period
Ended June 30, 2007		     Year Ended
December 31, 2006		  
    (unaudited)        

Operations:

    

Net investment income

   $ 27,487,203     $ 31,097,550  

Net realized gain on investments and foreign currency related transactions

     248,511,294       126,518,709  

Net change in unrealized appreciation/depreciation on investments and foreign currency related transactions

     229,372,136       506,665,332  
               

Net increase in net assets resulting from operations

     505,370,633       664,281,591  
               

Distributions to Shareholders from:

    

Net investment income

     —         (28,762,541 )

Realized gains on investments

     —         (78,438,057 )
               

Net decrease in net assets resulting from distributions

     —         (107,200,598 )
               

Capital Share Transactions (net) (Note 1-K)

     (164,253,506 )     714,038,419  
               

Redemption Fees

     102,744       602,369  
               

Total increase in net assets

     341,219,871       1,271,721,781  
               

Net Assets:

    

Beginning of period

     3,303,717,242       2,031,995,461  
               

End of period (including undistributed net investment income of $28,789,514 and $1,302,311, respectively)

   $ 3,644,937,113     $ 3,303,717,242  
               
See accompanying notes to financial statements.    
Matthews Asian Growth and Income Fund    
    Six-Month Period
Ended June 30, 2007		     Year Ended
December 31, 2006		  
    (unaudited)        

Operations:

    

Net investment income

   $ 23,231,934     $ 41,511,880  

Net realized gain on investments and foreign currency related transactions

     106,107,932       200,669,960  

Net change in unrealized appreciation/depreciation on investments and foreign currency related transactions

     101,909,725       145,635,112  
               

Net increase in net assets resulting from operations

     231,249,591       387,816,952  
               

Distributions to Shareholders from:

    

Net investment income

     (23,085,653 )     (60,297,751 )

Realized gains on investments

     (54,049,105 )     (173,639,745 )
               

Net decrease in net assets resulting from distributions

     (77,134,758 )     (233,937,496 )
               

Capital Share Transactions (net) (Note 1-K)

     49,903,655       190,839,416  
               

Redemption Fees

     53,777       85,403  
               

Total increase in net assets

     204,072,265       344,804,275  
               

Net Assets:

    

Beginning of period

     2,021,362,906       1,676,558,631  
               

End of period (including accumulated net investment loss of ($33,455,862) and ($33,602,143), respectively)

   $ 2,225,435,171     $ 2,021,362,906  
               

See accompanying notes to financial statements.

 

800.789.ASIA [2742] www.matthewsfunds.com    71

STATEMENTS OF CHANGES IN NET ASSETS

Matthews Asian Technology Fund

 

    Six-Month Period
Ended June 30, 2007		     Year Ended
December 31, 2006		  
    (unaudited)        

Operations:

    

Net investment loss

   $ (118,405 )   $ (266,483 )

Net realized gain on investments and foreign currency related transactions

     1,469,119       888,602  

Net change in unrealized appreciation/depreciation on investments and foreign currency related transactions

     14,533,623       16,104,233  
               

Net increase in net assets resulting from operations

     15,884,337       16,726,352  
               

Capital Share Transactions (net) (Note 1-K)

     13,529,919       62,525,534  
               

Redemption Fees

     91,537       141,207  
               

Total increase in net assets

     29,505,793       79,393,093  
               

Net Assets:

    

Beginning of period

     129,819,026       50,425,933  
               

End of period (including accumulated net investment loss of ($130,500) and ($12,095), respectively)

   $ 159,324,819     $ 129,819,026  
               
See accompanying notes to financial statements.    
Matthews China Fund    
    Six-Month Period
Ended June 30, 2007		     Year Ended
December 31, 2006		  
    (unaudited)        

Operations:

    

Net investment income

   $ 6,669,490     $ 5,637,294  

Net realized gain (loss) on investments and foreign currency related transactions

     85,891,229       (9,086,190 )

Net change in unrealized appreciation/depreciation on investments and foreign currency related transactions

     206,525,990       312,156,132  
               

Net increase in net assets resulting from operations

     299,086,709       308,707,236  
               

Distributions to Shareholders from:

    

Net investment income

     —         (5,623,850 )

Return of capital

     —         (31,925 )
               

Net decrease in net assets resulting from distributions

     —         (5,655,775 )
               

Capital Share Transactions (net) (Note 1-K)

     103,197,724       273,927,878  
               

Redemption Fees

     1,181,897       598,752  
               

Total increase in net assets

     403,466,330       577,578,091  
               

Net Assets:

    

Beginning of period

     966,528,041       388,949,950  
               

End of period (including undistributed/accumulated net investment income (loss) of $6,668,948 and ($542), respectively)

   $ 1,369,994,371     $ 966,528,041  
               

See accompanying notes to financial statements.

 

72    MATTHEWS ASIAN FUNDS

JUNE 30, 2007

 

Matthews India Fund

 

    Six-Month Period
Ended June 30, 2007		     Year Ended
December 31, 2006		  
    (unaudited)        

Operations:

    

Net investment income (loss)

   $ 275,850     $ (329,181 )

Net realized gain (loss) on investments and foreign currency related transactions

     25,425,368       (3,251,713 )

Net change in unrealized appreciation/depreciation on investments and foreign currency related transactions

     86,654,229       108,555,903  
               

Net increase in net assets resulting from operations

     112,355,447       104,975,009  
               

Capital Share Transactions (net) (Note 1-K)

     5,062,299       482,288,118  
               

Redemption Fees

     488,748       1,482,487  
               

Total increase in net assets

     117,906,494       588,745,614  
               

Net Assets:

    

Beginning of period

     669,642,926       80,897,312  
               

End of period (including undistributed net investment income of $275,850 and $0, respectively)

   $ 787,549,420     $ 669,642,926  
               
See accompanying notes to financial statements.    
Matthews Japan Fund    
    Six-Month Period
Ended June 30, 2007		     Year Ended
December 31, 2006		  
    (unaudited)        

Operations:

    

Net investment income (loss)

   $ 150,299     $ (1,083,269 )

Net realized gain on investments and foreign currency related transactions

     4,813,921       13,574,038  

Net change in unrealized appreciation/depreciation on investments and foreign currency related transactions

     (12,544,606 )     (43,736,931 )
               

Net decrease in net assets resulting from operations

     (7,580,386 )     (31,246,162 )
               

Capital Share Transactions (net) (Note 1-K)

     8,206,924       (59,917,684 )
               

Redemption Fees

     41,817       201,377  
               

Total increase (decrease) in net assets

     668,355       (90,962,469 )
               

Net Assets:

    

Beginning of period

     276,655,900       367,618,369  
               

End of period (including accumulated net investment loss of ($541,345) and ($691,644), respectively)

   $ 277,324,255     $ 276,655,900  
               

See accompanying notes to financial statements.

 

800.789.ASIA [2742] www.matthewsfunds.com    73

STATEMENTS OF CHANGES IN NET ASSETS

 

Matthews Korea Fund

 

    Six-Month Period
Ended June 30, 2007		     Year Ended
December 31, 2006		  
    (unaudited)        

Operations:

    

Net investment income (loss)

   $ 1,824,186     $ (254,119 )

Net realized gain on investments and foreign currency related transactions

     18,024,352       50,793,185  

Net change in unrealized appreciation/depreciation on investments and foreign currency related transactions

     5,652,828       (26,706,136 )
               

Net increase in net assets resulting from operations

     25,501,366       23,832,930  
               

Distributions to Shareholders from:

    

Net investment income

     —         (299,639 )

Realized gains on investments

     —         (33,182,764 )
               

Net decrease in net assets resulting from distributions

     —         (33,482,403 )
               

Capital Share Transactions (net) (Note 1-K)

     (26,025,562 )     (19,781,538 )
               

Redemption Fees

     31,958       508,556  
               

Total decrease in net assets

     (492,238 )     (28,922,455 )
               

Net Assets:

    

Beginning of period

     241,002,759       269,925,214  
               

End of period (including undistributed/accumulated net investment income (loss) of $1,792,322 and ($31,864), respectively)

   $ 240,510,521     $ 241,002,759  
               

See accompanying notes to financial statements.

 

74    MATTHEWS ASIAN FUNDS

JUNE 30, 2007

 

FINANCIAL HIGHLIGHTS

    JUNE 30, 2007

Matthews Asia Pacific Fund

The table below sets forth financial data for a share of beneficial interest outstanding throughout each period presented.

 

     Six-Month
Period Ended
June 30, 2007		     Years Ended
Dec 31,		     Four-Month
Period Ended
Dec 31,		     Period
Ended
Aug 31,		  
     (unaudited)     2006     2005     20041     20042  

Net Asset Value, beginning of period

    $ 16.92     $ 14.89     $ 12.58     $ 10.70     $ 10.00  
                                        

INCOME (LOSS) FROM INVESTMENT OPERATIONS:

           

Net investment income (loss)

      0.09       0.07       0.07       (0.01 )     0.02  

Net realized gain and unrealized appreciation on investments and foreign currency

      1.19       2.50       2.30       1.93       0.66  
                                        

Total from investment operations

      1.28       2.57       2.37       1.92       0.68  
                                        

LESS DISTRIBUTIONS FROM:

           

Net investment income

      —         (0.07 )     (0.06 )     (0.02 )     —    

Net realized gains on investments

      —         (0.48 )     —         (0.02 )     —    
                                        

Total distributions

      —         (0.55 )     (0.06 )     (0.04 )     —    
                                        

Paid-in capital from redemption fees (Note 1-K)

      0.01       0.01       —   3     —   3     0.02  
                                        

Net Asset Value, end of period

    $ 18.21     $ 16.92     $ 14.89     $ 12.58     $ 10.70  
                                        

TOTAL RETURN

      7.63 %4     17.39 %     18.84 %     18.00 %4     7.00 %4
                                        

RATIOS/SUPPLEMENTAL DATA

           

Net assets, end of period (in 000’s)

    $ 471,688     $ 449,699     $ 285,169     $ 112,043     $ 76,222  
                                        

Ratio of expenses to average net assets before reimbursement, waiver or recapture of expenses by Advisor and Administrator (Note 2)

      1.19 %5     1.26 %     1.35 %     1.52 %5     1.67 %5
                                        

Ratio of expenses to average net assets after reimbursement, waiver or recapture of expenses by Advisor and Administrator

      1.18 %5     1.24 %     1.34 %     1.51 %5     1.66 %5
                                        

Ratio of net investment income (loss) to average net assets before reimbursement, waiver or recapture of expenses by Advisor and Administrator

     1.02 %5     0.45 %     0.66 %     (0.31 )%5     0.38 %5
                                        

Ratio of net investment income (loss) to average net assets after reimbursement, waiver or recapture of expenses by Advisor and Administrator

     1.03 %5     0.47 %     0.67 %     (0.30 )%5     0.39 %5
                                        

Portfolio turnover

      29.01 %4     40.45 %     15.84 %     1.28 %4     10.75 %4
                                        

1

The Fund’s fiscal year end changed from August 31 to December 31, effective December 31, 2004.

2

The Matthews Asia Pacific Fund commenced operations on October 31, 2003.

3

Less than $0.01 per share.

4

Not annualized.

5

Annualized.

See accompanying notes to financial statements.

 

800.789.ASIA [2742] www.matthewsfunds.com    75

FINANCIAL HIGHLIGHTS

 

Matthews Asia Pacific Equity Income Fund

The table below sets forth financial data for a share of beneficial interest outstanding throughout each period presented.

 

     Six-Month
Period Ended
June 30, 2007		     Period Ended  
     (unaudited)     Dec 31, 20061  

Net Asset Value, beginning of period

    $ 10.77     $ 10.00  
                

INCOME FROM INVESTMENT OPERATIONS:

     

Net investment income

      0.10       0.02  

Net realized gain and unrealized appreciation on investments and foreign currency

      1.05       0.77  
                

Total from investment operations

      1.15       0.79  
                

LESS DISTRIBUTIONS FROM:

     

Net investment income

      (0.10 )     (0.02 )
                

Total distributions

      (0.10 )     (0.02 )
                

Paid-in capital from redemption fees (Note 1-K)

      0.01       —   2
                

Net Asset Value, end of period

    $ 11.83     $ 10.77  
                

TOTAL RETURN

      10.80 %3     7.90 %3
                

RATIOS/SUPPLEMENTAL DATA

     
Net assets, end of period (in 000’s)    $ 63,125     $ 25,740  
                
Ratio of expenses to average net assets before reimbursement, waiver or recapture of expenses by Advisor and Administrator (Note 2)      1.52 %4     2.93 %4
                
Ratio of expenses to average net assets after reimbursement, waiver or recapture of expenses by Advisor and Administrator      1.47 %4     1.50 %4
                
Ratio of net investment income (loss) to average net assets before reimbursement, waiver or recapture of expenses by Advisor and Administrator      2.17 %4     (0.10 )%4
                
Ratio of net investment income to average net assets after reimbursement, waiver or recapture of expenses by Advisor and Administrator      2.22 %4     1.34 %4
                
Portfolio turnover      9.56 %3     0.00 %3
                

1

The Matthews Asia Pacific Equity Income Fund commenced operations on October 31, 2006.

2

Less than $0.01 per share.

3

Not annualized.

4

Annualized.

See accompanying notes to financial statements.

 

76    MATTHEWS ASIAN FUNDS

JUNE 30, 2007

 

Matthews Pacific Tiger Fund

The table below sets forth financial data for a share of beneficial interest outstanding throughout each period presented.

 

     Six-Month
Period
Ended
June 30,
2007		     Year Ended
Dec 31,		     Four-
Month
Period
Ended
Dec 31,		     Years Ended Aug 31,  
     (unaudited)     2006     2005     20041     2004     2003     2002  

Net Asset Value, beginning of period

    $ 23.71     $ 19.27     $ 15.90     $ 13.22     $ 11.20     $ 8.54     $ 7.91  
                                                        

INCOME (LOSS) FROM INVESTMENT OPERATIONS:

               

Net investment income (loss)

      0.21       0.22       0.14       (0.01 )     0.09       0.07       (0.01 )

Net realized gain and unrealized appreciation on investments and foreign currency

      3.55       5.01       3.43       3.00       1.95       2.58       0.66  
                                                        

Total from investment operations

      3.76       5.23       3.57       2.99       2.04       2.65       0.65  
                                                        

LESS DISTRIBUTIONS FROM:

               

Net investment income

      —         (0.21 )     (0.12 )     (0.10 )     (0.04 )     —         (0.01 )

Net realized gains on investments

      —         (0.58 )     (0.09 )     (0.21 )     —         —         (0.03 )
                                                        

Total distributions

      —         (0.79 )     (0.21 )     (0.31 )     (0.04 )     —         (0.04 )
                                                        

Paid-in capital from redemption fees (Note 1-K)

      —   2     —   2     0.01       —   2     0.02       0.01       0.02  
                                                        

Net Asset Value, end of period

    $ 27.47     $ 23.71     $ 19.27     $ 15.90     $ 13.22     $ 11.20     $ 8.54  
                                                        

TOTAL RETURN

      15.86 %3     27.22 %     22.51 %     22.69 %3     18.45 %     31.15 %     8.44 %
                                                        

RATIOS/SUPPLEMENTAL DATA

               

Net assets, end of period (in 000’s)

    $ 3,644,937     $ 3,303,717     $ 2,031,995     $ 855,153     $ 587,133     $ 229,467     $ 114,798  
                                                        
Ratio of expenses to average net assets before reimbursement, waiver or recapture of expenses by Advisor and Administrator (Note 2)      1.12 %4     1.18 %     1.31 %     1.39 %4     1.50 %     1.75 %     1.79 %
                                                        
Ratio of expenses to average net assets after reimbursement, waiver or recapture of expenses by Advisor and Administrator      1.11 %4     1.16 %     1.31 %     1.36 %4     1.48 %     1.75 %     1.87 %
                                                        
Ratio of net investment income (loss) to average net assets before reimbursement, waiver or recapture of expenses by Advisor and Administrator      1.62 %4     1.10 %     1.10 %     (0.19 )%4     0.93 %     1.04 %     (0.17 )%
                                                        
Ratio of net investment income (loss) to average net assets after reimbursement, waiver or recapture of expenses by Advisor and Administrator      1.63 %4     1.12 %     1.10 %     (0.16 )%4     0.95 %     1.04 %     (0.09 )%
                                                        
Portfolio turnover      15.71 %3     18.80 %     3.03 %     3.82 %3     15.16 %     28.24 %     57.00 %
                                                        

1

The Fund’s fiscal year end changed from August 31 to December 31, effective December 31, 2004.

2

Less than $0.01 per share.

3

Not annualized.

4

Annualized.

See accompanying notes to financial statements.

 

800.789.ASIA [2742] www.matthewsfunds.com    77

FINANCIAL HIGHLIGHTS

 

Matthews Asian Growth and Income Fund

The table below sets forth financial data for a share of beneficial interest outstanding throughout each period presented.

 

     Six-Month
Period
Ended
June 30,
2007		     Year Ended Dec 31,    

Four-
Month
Period
Ended

Dec 31,

     Years Ended Aug 31,  
     (unaudited)     2006     2005     20041     2004     2003     2002  

Net Asset Value, beginning of period

    $ 18.68     $ 17.14     $ 15.82     $ 14.65     $ 12.21     $ 10.71     $ 9.08  
                                                        

INCOME FROM INVESTMENT OPERATIONS:

               

Net investment income

      0.22       0.46       0.45       0.11       0.32       0.23       0.18  

Net realized gain and unrealized appreciation on investments and foreign currency

      1.94       3.47       2.02       1.83       2.56       1.61       1.70  
                                                        

Total from investment operations

      2.16       3.93       2.47       1.94       2.88       1.84       1.88  
                                                        

LESS DISTRIBUTIONS FROM:

               

Net investment income

      (0.22 )     (0.62 )     (0.43 )     (0.38 )     (0.25 )     (0.20 )     (0.27 )

Net realized gains on investments

      (0.50 )     (1.77 )     (0.72 )     (0.39 )     (0.20 )     (0.15 )     —    
                                                        

Total distributions

      (0.72 )     (2.39 )     (1.15 )     (0.77 )     (0.45 )     (0.35 )     (0.27 )
                                                        

Paid-in capital from redemption fees (Note 1-K)

      —   2     —   2     —   2     —   2     0.01       0.01       0.02  
                                                        

Net Asset Value, end of period

    $ 20.12     $ 18.68     $ 17.14     $ 15.82     $ 14.65     $ 12.21     $ 10.71  
                                                        

TOTAL RETURN

      11.57 %3     23.38 %     15.76 %     13.32 %3     23.99 %     17.81 %     21.11 %
                                                        

RATIOS/SUPPLEMENTAL DATA

               
Net assets, end of period (in 000’s)    $ 2,225,435     $ 2,021,363     $ 1,676,559     $ 1,236,491     $ 1,007,187     $ 533,302     $ 152,681  
                                                        
Ratio of expenses to average net assets before reimbursement, waiver or recapture of expenses by Advisor and Administrator (Note 2)      1.16 %4     1.20 %     1.28 %     1.35 %4     1.45 %     1.69 %     1.77 %
                                                        
Ratio of expenses to average net assets after reimbursement, waiver or recapture of expenses by Advisor and Administrator      1.15 %4     1.19 %     1.27 %     1.31 %4     1.44 %     1.69 %     1.79 %
                                                        
Ratio of net investment income to average net assets before reimbursement, waiver or recapture of expenses by Advisor and Administrator      2.20 %4     2.26 %     2.59 %     2.15 %4     2.27 %     2.69 %     2.13 %
                                                        
Ratio of net investment income to average net assets after reimbursement, waiver or recapture of expenses by Advisor and Administrator      2.21 %4     2.27 %     2.60 %     2.19 %4     2.28 %     2.69 %     2.11 %
                                                        
Portfolio turnover      12.46 %3     28.37 %     20.16 %     7.32 %3     17.46 %     13.33 %     32.37 %
                                                        

1

The Fund’s fiscal year end changed from August 31 to December 31, effective December 31, 2004.

2

Less than $0.01 per share.

3

Not annualized.

4

Annualized.

See accompanying notes to financial statements.

 

78    MATTHEWS ASIAN FUNDS

JUNE 30, 2007

 

Matthews Asian Technology Fund

The table below sets forth financial data for a share of beneficial interest outstanding throughout each period presented.

 

     Six-Month
Period
Ended
June 30,
2007		    

Year Ended

Dec 31,

     Four-
Month
Period
Ended
Dec 31,		     Years Ended Aug 31,  
   (unaudited)     2006     2005     20041     2004     2003     2002  

Net Asset Value, beginning of period

    $ 7.92     $ 6.53     $ 5.45     $ 4.83     $ 4.30     $ 3.13     $ 3.53  
                                                        

INCOME (LOSS) FROM INVESTMENT OPERATIONS:

               

Net investment income (loss)

      (0.01 )     (0.02 )     —   2     (0.02 )     (0.02 )     (0.01 )     (0.10 )

Net realized gain (loss) and unrealized appreciation (depreciation) on investments and foreign currency

      0.91       1.40       1.08       0.64       0.53       1.16       (0.31 )
                                                        

Total from investment operations

      0.90       1.38       1.08       0.62       0.51       1.15       (0.41 )
                                                        

LESS DISTRIBUTIONS FROM:

               

Net investment income

      —         —         —         —         —         —         (0.04 )
                                                        

Total distributions

      —         —         —         —         —         —         (0.04 )
                                                        

Paid-in capital from redemption fees (Note 1-K)

      0.01       0.01       —   2     —   2     0.02       0.02       0.05  
                                                        

Net Asset Value, end of period

    $ 8.83     $ 7.92     $ 6.53     $ 5.45     $ 4.83     $ 4.30     $ 3.13  
                                                        

TOTAL RETURN

      11.49 %3     21.29 %     19.82 %     12.84 %3     12.40 %     37.38 %     (10.40 )%
                                                        

RATIOS/SUPPLEMENTAL DATA

               

Net assets, end of period (in 000’s)

    $ 159,325     $ 129,819     $ 50,426     $ 38,865     $ 34,297     $ 18,769     $ 6,879  
                                                        
Ratio of expenses to average net assets before reimbursement, waiver or recapture of expenses by Advisor and Administrator (Note 2)      1.27 %4     1.41 %     1.49 %     1.64 %4     1.63 %     2.10 %     2.01 %
                                                        
Ratio of expenses to average net assets after reimbursement, waiver or recapture of expenses by Advisor and Administrator      1.26 %4     1.39 %     1.48 %     1.60 %4     1.91 %     2.00 %     2.00 %
                                                        
Ratio of net investment income (loss) to average net assets before reimbursement, waiver or recapture of expenses by Advisor and Administrator      (0.17 )%4     (0.31 )%     0.07 %     (0.89 )%4     (0.03 )%     (0.71 )%     (1.56 )%
                                                        
Ratio of net investment income (loss) to average net assets after reimbursement, waiver or recapture of expenses by Advisor and Administrator      (0.16 )%4     (0.29 )%     0.08 %     (0.85 )%4     (0.31 )%     (0.61 )%     (1.55 )%
                                                        
Portfolio turnover      24.79 %3     34.77 %     29.76 %     7.36 %3     41.25 %     72.03 %     103.60 %
                                                        

1

The Fund’s fiscal year end changed from August 31 to December 31, effective December 31, 2004.

2

Less than $0.01 per share.

3

Not annualized.

4

Annualized.

See accompanying notes to financial statements.

 

800.789.ASIA [2742] www.matthewsfunds.com    79

FINANCIAL HIGHLIGHTS

 

Matthews China Fund

The table below sets forth financial data for a share of beneficial interest outstanding throughout each period presented.

 

     Six-Month
Period
Ended
June 30,
2007		     Year Ended
Dec 31,		     Four-
Month
Period
Ended
Dec 31,		     Years Ended Aug 31,  
     (unaudited)     2006     2005     20041     2004     2003     2002  

Net Asset Value, beginning of period

    $ 24.16     $ 14.76     $ 14.01     $ 13.26     $ 11.54     $ 8.96     $ 9.21  
                                                        

INCOME (LOSS) FROM INVESTMENT OPERATIONS:

               

Net investment income

      0.15       0.15       0.22       0.03       0.08       0.11       0.05  

Net realized gain (loss) and unrealized appreciation (depreciation) on investments and foreign currency

      6.86       9.39       0.74       1.38       1.67       2.59       (0.20 )
                                                        

Total from investment operations

      7.01       9.54       0.96       1.41       1.75       2.70       (0.15 )
                                                        

LESS DISTRIBUTIONS FROM:

               

Net investment income

      —         (0.15 )     (0.22 )     (0.14 )     (0.07 )     (0.14 )     (0.15 )

Net realized gains on investments

      —         —         —         (0.53 )     —         —         —    

Return of capital

      —         —   2     —         —         —         —         —    
                                                        

Total distributions

      —         (0.15 )     (0.22 )     (0.67 )     (0.07 )     (0.14 )     (0.15 )
                                                        

Paid-in capital from redemption fees (Note 1-K)

      0.03       0.01       0.01       0.01       0.04       0.02       0.05  
                                                        

Net Asset Value, end of period

    $ 31.20     $ 24.16     $ 14.76     $ 14.01     $ 13.26     $ 11.54     $ 8.96  
                                                        

TOTAL RETURN

      29.14 %3     64.81 %     6.91 %     10.61 %3     15.48 %     30.88 %     (1.16 )%
                                                        

RATIOS/SUPPLEMENTAL DATA

               

Net assets, end of period (in 000’s)

    $ 1,369,994     $ 966,528     $ 388,950     $ 380,121     $ 340,251     $ 111,950     $ 33,675  
                                                        
Ratio of expenses to average net assets before reimbursement, waiver or recapture of expenses by Advisor and Administrator (Note 2)      1.18 %4     1.27 %     1.31 %     1.47 %4     1.52 %     1.78 %     1.97 %
                                                        
Ratio of expenses to average net assets after reimbursement, waiver or recapture of expenses by Advisor and Administrator      1.17 %4     1.26 %     1.30 %     1.43 %4     1.50 %     1.79 %     2.00 %
                                                        
Ratio of net investment income to average net assets before reimbursement, waiver or recapture of expenses by Advisor and Administrator      1.14 %4     0.95 %     1.45 %     0.81 %4     1.02 %     1.94 %     0.99 %
                                                        
Ratio of net investment income to average net assets after reimbursement, waiver or recapture of expenses by Advisor and Administrator      1.15 %4     0.96 %     1.46 %     0.85 %4     1.04 %     1.93 %     0.96 %
                                                        
Portfolio turnover      13.62 %3     11.65 %     11.82 %     4.99 %3     28.99 %     19.34 %     43.84 %
                                                        

1

The Fund’s fiscal year end changed from August 31 to December 31, effective December 31, 2004.

2

Less than $0.01 per share.

3

Not annualized.

4

Annualized.

See accompanying notes to financial statements.

 

80    MATTHEWS ASIAN FUNDS

JUNE 30, 2007

 

Matthews India Fund

The table below sets forth financial data for a share of beneficial interest outstanding throughout each period presented.

 

     Six-Month
Period Ended
June 30, 2007
(unaudited)		     Year Ended
Dec 31,
2006		     Year Ended
Dec 31,
20051		  

Net Asset Value, beginning of period

    $ 15.45     $ 11.32     $ 10.00  
                        

INCOME (LOSS) FROM INVESTMENT OPERATIONS:

       

Net investment income (loss)

      0.01       (0.01 )     (0.01 )

Net realized gain and unrealized appreciation on investments and foreign currency

      2.80       4.11       1.33  
                        

Total from investment operations

      2.81       4.10       1.32  
                        

Paid-in capital from redemption fees (Note 1-L)

      0.01       0.03       —   2
                        

Net Asset Value, end of period

    $ 18.27     $ 15.45     $ 11.32  
                        

TOTAL RETURN

      18.25 %3     36.48 %     13.20 %3
                        

RATIOS/SUPPLEMENTAL DATA

       

Net assets, end of period (in 000’s)

    $ 787,549     $ 669,643     $ 80,897  
                        
Ratio of expenses to average net assets before reimbursement, waiver or recapture of expenses by Advisor and Administrator (Note 2)      1.30 %4     1.41 %     2.75 %4
                        
Ratio of expenses to average net assets after reimbursement, waiver or recapture of expenses by Advisor and Administrator      1.29 %4     1.41 %     2.00 %4
                        
Ratio of net investment income (loss) to average net assets before reimbursement, waiver or recapture of expenses by Advisor and Administrator      0.07 %4     (0.08 )%     (1.92 )%4
                        
Ratio of net investment income (loss) to average net assets after reimbursement, waiver or recapture of expenses by Advisor and Administrator      0.08 %4     (0.08 )%     (1.17 )%4
                        
Portfolio turnover      20.18 %3     21.57 %     0.00 %3
                        

1

The Matthews India Fund commenced operations on October 31, 2005.

2

Less than $0.01 per share.

3

Not annualized.

4

Annualized.

See accompanying notes to financial statements.

 

800.789.ASIA [2742] www.matthewsfunds.com    81

FINANCIAL HIGHLIGHTS

 

Matthews Japan Fund

The table below sets forth financial data for a share of beneficial interest outstanding throughout each period presented.

 

     Six-Month
Period
Ended
June 30,
2007		     Year Ended
Dec 31,		     Four-
Month
Period
Ended
Dec 31,		     Years Ended Aug 31,  
     (unaudited)     2006     2005     20041     2004     2003     2002  

Net Asset Value, beginning of period

    $ 17.29     $ 18.48     $ 16.12     $ 14.73     $ 10.90     $ 9.60     $ 11.22  
                                                        

INCOME (LOSS) FROM INVESTMENT OPERATIONS:

               

Net investment income (loss)

      0.01       (0.08 )     0.02       (0.02 )     (0.05 )     (0.03 )     (0.07 )

Net realized gain (loss) and unrealized appreciation (depreciation) on investments and foreign currency

      (0.41 )     (1.12 )     2.36       1.40       3.82       1.30       (1.39 )
                                                        

Total from investment operations

      (0.40 )     (1.20 )     2.38       1.38       3.77       1.27       (1.46 )
                                                        

LESS DISTRIBUTIONS FROM:

               

Net investment income

      —         —         (0.03 )     —         —         —         (0.27 )
                                                        

Total distributions

      —         —         (0.03 )     —         —         —         (0.27 )
                                                        

Paid-in capital from redemption fees (Note 1-K)

      —   2     0.01       0.01       0.01       0.06       0.03       0.11  
                                                        

Net Asset Value, end of period

    $ 16.89     $ 17.29     $ 18.48     $ 16.12     $ 14.73     $ 10.90     $ 9.60  
                                                        

TOTAL RETURN

      (2.31 )%3     (6.44 )%     14.83 %     9.44 %3     35.14 %     13.54 %     (12.20 )%
                                                        

RATIOS/SUPPLEMENTAL DATA

               
Net assets, end of period (in 000’s)    $ 277,324     $ 276,656     $ 367,618     $ 200,482     $ 195,256     $ 23,653     $ 9,399  
                                                        
Ratio of expenses to average net assets before reimbursement, waiver or recapture of expenses by Advisor and Administrator (Note 2)      1.25 %4     1.25 %     1.29 %     1.40 %4     1.46 %     1.92 %     1.91 %
                                                        
Ratio of expenses to average net assets after reimbursement, waiver or recapture of expenses by Advisor and Administrator      1.24 %4     1.24 %     1.28 %     1.38 %4     1.45 %     2.00 %     2.00 %
                                                        
Ratio of net investment income (loss) to average net assets before reimbursement, waiver or recapture of expenses by Advisor and Administrator      0.09 %4     (0.30 )%     (0.11 )%     (0.33 )%4     (0.72 )%     (0.97 )%     (1.25 )%
                                                        
Ratio of net investment income (loss) to average net assets after reimbursement, waiver or recapture of expenses by Advisor and Administrator      0.10 %4     (0.29 )%     (0.10 )%     (0.31 )%4     (0.71 )%     (1.05 )%     (1.34 )%
                                                        
Portfolio turnover      24.13 %3     59.95 %     20.88 %     5.30 %3     14.57 %     77.30 %     113.23 %
                                                        

1

The Fund’s fiscal year end changed from August 31 to December 31, effective December 31, 2004.

2

Less than $0.01 per share.

3

Not annualized.

4

Annualized.

See accompanying notes to financial statements.

 

82    MATTHEWS ASIAN FUNDS

JUNE 30, 2007

 

Matthews Korea Fund

The table below sets forth financial data for a share of beneficial interest outstanding throughout each period presented.

 

     Six-Month
Period
Ended
June 30,
2007		     Year Ended
Dec 31,		     Four-
Month
Period
Ended
Dec 31,		     Years Ended Aug 31,  
     (unaudited)     2006     2005     20041     2004     2003     2002  

Net Asset Value, beginning of period

    $ 6.23     $ 6.37     $ 4.08     $ 3.94     $ 4.37     $ 4.42     $ 2.68  
                                                        

INCOME (LOSS) FROM INVESTMENT OPERATIONS:

               

Net investment income (loss)

      0.05       0.01       0.01       —         0.04       0.01       (0.02 )

Net realized gain and unrealized appreciation on investments and foreign currency

      0.75       0.80       2.39       0.78       0.34       0.32       1.81  
                                                        

Total from investment operations

      0.80       0.81       2.40       0.78       0.38       0.33       1.79  
                                                        

LESS DISTRIBUTIONS FROM:

               

Net investment income

      —         (0.01 )     —         (0.01 )     —         —         (0.01 )

Net realized gains on investments

      —         (0.95 )     (0.11 )     (0.63 )     (0.82 )     (0.39 )     (0.07 )
                                                        

Total distributions

      —         (0.96 )     (0.11 )     (0.64 )     (0.82 )     (0.39 )     (0.08 )
                                                        

Paid-in capital from redemption fees (Note 1-K)

      —   2     0.01       —   2     —   2     0.01       0.01       0.03  
                                                        

Net Asset Value, end of period

    $ 7.03     $ 6.23     $ 6.37     $ 4.08     $ 3.94     $ 4.37     $ 4.42  
                                                        

TOTAL RETURN

      12.84 %3     12.99 %     58.76 %     20.60 %3     9.91 %     8.80 %     68.49 %
                                                        

RATIOS/SUPPLEMENTAL DATA

               
Net assets, end of period (in 000’s)    $ 240,511     $ 241,003     $ 269,925     $ 127,794     $ 110,199     $ 217,267     $ 253,003  
                                                        
Ratio of expenses to average net assets before reimbursement, waiver or recapture of expenses by Advisor and Administrator (Note 2)      1.26 %4     1.30 %     1.35 %     1.49 %4     1.51 %     1.72 %     1.75 %
                                                        
Ratio of expenses to average net assets after reimbursement, waiver or recapture of expenses by Advisor and Administrator      1.25 %4     1.28 %     1.35 %     1.31 %4     1.50 %     1.72 %     1.75 %
                                                        
Ratio of net investment income (loss) to average net assets before reimbursement, waiver or recapture of expenses by Advisor and Administrator      1.65 %4     (0.11 )%     0.27 %     (0.87 )%4     0.28 %     0.17 %     (0.64 )%
                                                        
Ratio of net investment income (loss) to average net assets after reimbursement, waiver or recapture of expenses by Advisor and Administrator      1.66 %4     (0.09 )%     0.27 %     (0.69 )%4     0.29 %     0.17 %     (0.64 )%
                                                        
Portfolio turnover      13.10 %3     25.82 %     10.13 %     6.53 %3     18.40 %     29.90 %     46.52 %
                                                        

1

The Fund’s fiscal year end changed from August 31 to December 31, effective December 31, 2004.

2

Less than $0.01 per share.

3

Not annualized.

4

Annualized.

See accompanying notes to financial statements.

 

800.789.ASIA [2742] www.matthewsfunds.com    83

NOTES TO FINANCIAL STATEMENTS

 

1. SIGNIFICANT ACCOUNTING POLICIES

Matthews Asian Funds (the “Trust”) is an open-end investment management company registered under the Investment Company Act of 1940, as amended (the “Act”). The Trust currently issues nine separate series of shares (each a “Fund” and collectively, the “Funds”): Matthews Asia Pacific Fund, Matthews Asia Pacific Equity Income Fund, Matthews Pacific Tiger Fund, Matthews Asian Growth and Income Fund, Matthews Asian Technology Fund, Matthews China Fund, Matthews India Fund, Matthews Japan Fund and Matthews Korea Fund. Matthews Pacific Tiger Fund, Matthews China Fund and Matthews Korea Fund are authorized to offer two classes of shares: Class I shares and Class A shares. Currently, only Class I shares are offered. Effective December 31, 2004, the Funds fiscal year end changed from August 31 to December 31. The following is a summary of significant accounting policies consistently followed by the Funds in preparation of their financial statements.

 

A. SECURITY VALUATION: The Funds’ equity securities are valued based on market quotations or at fair value as determined in good faith by or under the direction of the Board of Trustees (the “Board”) when no market quotations are available or when market quotations have become unreliable. The Board has delegated the responsibility of making fair value determinations to the Pricing Valuation Committee (the “Valuation Committee”) of Matthews International Capital Management, LLC (the “Advisor”), subject to the Funds’ Pricing Policies. The Board has retained a third-party pricing service which may be utilized by the Valuation Committee under circumstances described in the Pricing Policies to provide fair value prices for certain securities held by the Funds. When fair value pricing is employed, the prices of securities used by a Fund to calculate its NAV differ from quoted or published prices for the same securities for that day. All fair value determinations are made subject to the Board’s oversight.

The books and records of the Funds are maintained in U.S. Dollars. Transactions denominated in foreign currencies are recorded at the current prevailing exchange rates. All assets and liabilities denominated in foreign currencies are translated into U.S. Dollars at the current exchange rate. Translation gains or losses resulting from changes in the exchange rate during the reporting period and realized gains and losses on the settlement of foreign currency transactions are reported in the results of operations for the current period. The Funds do not isolate that portion of gains and losses on investments in equity securities which is due to changes in the foreign exchange rate from that which is due to changes in market prices of equity securities. International dollar bonds are issued offshore, pay interest and principal in U.S. Dollars, and are denominated in U.S. Dollars.

Market values for equity securities are determined based on the last sale price on the principal exchange or over-the-counter market on which the security is traded. If a reliable last sale price is not available, market values for equity securities are determined using the mean between the last available bid and asked price. Securities are valued through valuations obtained from a commercial pricing service or at the most recent mean of the bid and asked prices provided by investment dealers in accordance with procedures established by the Board.

Foreign securities are valued as of the close of trading on the primary exchange on which they trade. The value is then converted to U.S. dollars using current exchange rates and in accordance with the Pricing Policies.

Foreign currency exchange rates are determined at the close of trading on the New York Stock Exchange, Inc. (“NYSE”). Occasionally, events affecting the value of foreign investments occur between the time at which they are determined and the close of trading on the NYSE. Such events would not normally be reflected in a calculation of a Funds’ NAV on that day. If events that materially affect the value of the Funds’ foreign investments occur during such period, the investments will be valued at their fair value as described above.

Foreign securities held by the Funds may be traded on days and at times when the NYSE is closed. Accordingly, the NAV of the Funds may be significantly affected on days when shareholders have no access to the Funds. For valuation purposes, quotations of foreign portfolio securities, other assets and liabilities, and forward contracts stated in foreign currency are translated into U.S. dollar equivalents at the prevailing market rates.

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement on Financial Accounting Standards No. 157, Fair Value Measurements (“SFAS 157”). This standard establishes a single authoritative definition of fair value, sets out a framework for measuring fair value and requires additional disclosures about fair value measurements. SFAS 157 applies to fair value measurements already required or permitted by existing standards. SFAS 157 is effective for financial statements

 

84    MATTHEWS ASIAN FUNDS

JUNE 30, 2007

 

issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The changes to current generally accepted accounting principles from the application of SFAS 157 relate to the definition of fair value, the methods used to measure fair value, and the expanded disclosures about fair value measurements. As of June 30, 2007, the Fund does not believe the adoption of SFAS 157 will impact the amounts reported in the financial statements, however, additional disclosures may be required about the inputs used to develop the measurements and the effect of certain of the measurements reported on the statement of changes in net assets for a fiscal period.

 

B. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS: The Funds may engage in forward foreign currency exchange contracts for hedging a specific transaction in which the currency is denominated as deemed appropriate by the Advisor. Forward foreign currency exchange contracts are valued at the forward rate and are marked-to-market daily. The change in market value is recorded by the Funds as an unrealized gain or loss. When the contract is closed, the Funds record a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed.

The use of forward foreign currency exchange contracts does not eliminate fluctuations in the underlying prices of the Funds’ portfolio securities, but it does establish a rate of exchange that can be achieved in the future. Although forward foreign currency exchange contracts limit the risk of loss due to a decline in the value of the hedged currency, they also limit any potential gain that might result should the value of the currency increase. In addition, the Funds could be exposed to risks if the counterparts to the contract are unable to meet the terms of their contracts.

 

C. RISKS ASSOCIATED WITH NON-U.S. COMPANIES: Investments by the Funds in the securities of non-U.S. companies may involve investment risks different from those of U.S. issuers including possible political or economical instability of the country of the issuer, the possibility of disruption to international trade patterns, the possibility of currency crises and exchange controls, the possible imposition of foreign withholding tax on the interest income payable on such instruments, the possible establishment of foreign controls, the possible seizure or nationalization of foreign deposits or assets, or the adoption of other foreign government restrictions that might adversely affect the foreign securities held by the Funds. Foreign securities may also be subject to greater fluctuations in price than securities of domestic corporations or the U.S. government. There may be less publicly available information about a non-U.S. company than about a U.S. company. Sometimes non-U.S. companies are subject to different accounting, auditing, and financial reporting standards, practices, and requirements than U.S. companies. There is generally less government regulation of stock exchanges, brokers, and listed companies abroad than in the U.S., which may result in less transparency with respect to a company’s operations. The absence of negotiated brokerage commissions in certain countries may result in higher brokerage fees. With respect to certain non-U.S. countries, there is a possibility of expropriation, nationalization, confiscatory taxation, or diplomatic developments that could affect investments in those countries.

 

D. FEDERAL INCOME TAXES: It is the policy of the Funds to comply with all requirements of the Internal Revenue Code of 1986, as amended (“the Code”) applicable to regulated investment companies and to distribute substantially all of their taxable income to their shareholders. The Funds have met the requirements of the Code applicable to regulated investment companies for the period ended June 30, 2007. Therefore, no federal income tax provision is required. Income and capital gains of the Funds are determined in accordance with both tax regulations and accounting principles generally accepted in the U.S. Such treatment may result in temporary and permanent differences between tax basis earnings and earnings reported for financial statement purposes. These reclassifications, which have no impact on the net asset value of the Funds, are primarily attributable to certain differences in computation of distributable income and capital gains under federal tax rules versus accounting principles generally accepted in the U.S. and the use of the tax accounting practice known as equalization. The amount and character of tax-basis distributions and composition of net assets are finalized at fiscal year end; accordingly, tax-basis balances have not been determined as of June 30, 2007.

In July 2006, the FASB issued Interpretation No.48, “Accounting for Uncertainty in Income Taxes and Interpretation of FASB Statement No. 109” (the “Interpretation”). The Interpretation establishes for all entities, including pass-through entities such as the Funds, a minimum threshold for financial statement recognition of the benefit of positions taken in filing tax returns (including whether an entity is taxable in a particular jurisdiction), and requires certain expanded tax disclosures. The Interpretation was

 

800.789.ASIA [2742] www.matthewsfunds.com    85

NOTES TO FINANCIAL STATEMENTS

 

implemented on June 29, 2007, and is to be applied to all open tax years as of the date of effectiveness. Management has evaluated the application of the Interpretation to the Funds, and the adoption of the interpretation has no impact on the amounts reported in the Funds’ financial statements.

Under the current tax law, capital and currency losses realized after October 31 and prior to the Fund’s fiscal year end may be deferred as occurring on the first day of the following fiscal year. Post October losses at the fiscal year ended December 31, 2006 were as follows:

 

     POST OCTOBER CAPITAL LOSSES     POST OCTOBER CURRENCY LOSSES  

Matthews Asia Pacific Equity Income Fund

   $ —       $ (5,232 )

Matthews Pacific Tiger Fund

     —         (74,412 )

Matthews Asian Technology Fund

     (12,095 )     (79,224 )

Matthews China Fund

     —         (542 )

Matthews Korea Fund

     —         (31,864 )

For federal income tax purposes, the Funds indicated below have capital loss carryforwards, which expire in the year indicated, as of December 31, 2006, which are available to offset future capital gains, if any:

 

LOSSES DEFERRED EXPIRING IN:

    2008     2009     2010     2011  

Matthews Asian Technology Fund

    $ (3,293,471 )   $ (5,967,059 )   $ (3,461,198 )   $ —    

Matthews China Fund

      —         —         —         —    

Matthews India Fund

      —         —         —         —    

LOSSES DEFERRED EXPIRING IN:

    2012     2013     2014     Total  

Matthews Asian Technology Fund

    $ —       $ —       $ —       $ (12,721,728 )

Matthews China Fund

      (78,979 )     (6,184,085 )     (9,072,204 )     (15,335,268 )

Matthews India Fund

      —         —         (2,320,226 )     (2,320,226 )

 

E. DETERMINATION OF GAINS OR LOSSES ON SALES OF SECURITIES: Gains or losses on the sale of securities are determined on the identified cost basis.

 

F. ORGANIZATION COSTS: Organization costs are amortized on a straight-line basis over one year from each Fund’s respective commencement of operations. In the event that any of the initial shares are redeemed during the period of amortization of the Fund’s organization costs, the redemption proceeds will be reduced by any such unamortized organization costs in the same proportion as the number of shares being redeemed bears to the number of those shares outstanding at the time of redemption.

 

G. DISTRIBUTIONS TO SHAREHOLDERS: It is the policy of Matthews Asian Growth and Income Fund to distribute net investment income on a semi-annual basis and capital gains, if any, annually. Matthews Asia Pacific Fund, Mathews Asia Pacific Equity Income Fund, Matthews Pacific Tiger Fund, Matthews Asian Technology Fund, Matthews China Fund, Matthews India Fund, Matthews Japan Fund and Matthews Korea Fund distribute net investment income and capital gains, if any, annually. Distributions to shareholders are recorded on the ex-dividend date. Income and capital gain distributions are determined in accordance with income tax regulations which may differ from accounting principles generally accepted in the U.S. Net investment losses may not be utilized to offset net investment income in future periods for tax purposes.

 

86    MATTHEWS ASIAN FUNDS

JUNE 30, 2007

 

The tax character of distributions paid for the fiscal year ended December 31, 2006 were as follows:

 

YEAR ENDED DECEMBER 31, 2006

    ORDINARY
INCOME		    NET LONG-TERM
CAPITAL GAINS		    RETURN
OF CAPITAL		    TOTAL TAXABLE
DISTRIBUTIONS

Matthews Asia Pacific Fund

    $ 1,793,500    $ 12,307,363    $ —      $ 14,100,863

Matthews Asia Pacific Equity Income Fund

      28,465      —        —        28,465

Matthews Pacific Tiger Fund

      40,731,212      66,469,386      —        107,200,598

Matthews Asian Growth and Income Fund

      62,152,612      171,784,884      —        233,937,496

Matthews China Fund

      5,623,850      —        31,925      5,655,775

Matthews Korea Fund*

      752,918      32,729,485      —        33,482,403

*  The $237,374 of ordinary income and $8,880,187 of long-term capital gain distributions designated for federal income tax purposes are due to the utilization of accumulated earnings and profits distributed to shareholders upon redemption of shares.

 

H. FUND EXPENSE ALLOCATIONS: The Funds account separately for the assets, liabilities and operations of each Fund. Direct expenses of each Fund are charged to the Fund while general expenses are allocated pro-rata among the Funds based on net assets.

 

I. USE OF ESTIMATES: The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results may differ from those estimates.

 

J. OTHER: Securities transactions are accounted for on the date the securities are purchased or sold. Interest income is recorded on the accrual basis. Dividend income and distributions to shareholders are recorded on the ex-dividend date, except for certain dividends which are recorded as soon as the dividend information becomes available.

 

K. CAPITAL SHARE TRANSACTIONS: Each Fund is authorized to issue an unlimited number of shares of beneficial interest with a par value of $0.001 per share.

 

MATTHEWS ASIA PACIFIC FUND

    SIX-MONTH PERIOD ENDED
JUNE 30, 2007 (UNAUDITED)		     YEAR ENDED DECEMBER 31, 2006  
     SHARES     AMOUNT     SHARES     AMOUNT  

Shares sold

    5,525,082     $ 94,562,829     14,546,817     $ 231,141,309  

Shares issued through reinvestment of distributions

    —         —       617,765       10,267,292  

Shares redeemed

    (6,192,382 )     (106,780,414 )   (7,738,962 )     (119,682,592 )
                            

Net increase (decrease)

    (667,300 )   $ (12,217,585 )   7,425,620     $ 121,726,009  
                            

MATTHEWS ASIA PACIFIC EQUITY INCOME FUND*

    SIX-MONTH PERIOD ENDED
JUNE 30, 2007 (UNAUDITED)		     YEAR ENDED DECEMBER 31, 2006  
     SHARES     AMOUNT     SHARES     AMOUNT  

Shares sold

    3,716,138     $ 41,672,915     2,392,917     $ 24,739,894  

Shares issued through reinvestment of distributions

    43,430       511,173     2,507       26,502  

Shares redeemed

    (815,361 )     (9,115,364 )   (4,405 )     (46,454 )
                            

Net increase

    2,944,207     $ 33,068,724     2,391,019     $ 24,719,942  
                            

*  The Matthews Asia Pacific Equity Income Fund commenced operations on October 31, 2006.

    

 

800.789.ASIA [2742] www.matthewsfunds.com    87

NOTES TO FINANCIAL STATEMENTS

 

MATTHEWS PACIFIC TIGER FUND

    SIX-MONTH PERIOD ENDED
JUNE 30, 2007 (UNAUDITED)		     YEAR ENDED DECEMBER 31, 2006  
     SHARES     AMOUNT     SHARES     AMOUNT  

Shares sold

    7,989,642     $ 196,392,750     60,856,753     $ 1,258,960,286  

Shares issued through reinvestment of distributions

    —         —       3,349,416       77,806,911  

Shares redeemed

    (14,621,819 )     (360,646,256 )   (30,332,221 )     (622,728,778 )
                            

Net increase (decrease)

    (6,632,177 )     (164,253,506 )   33,873,948     $ 714,038,419  
                            

MATTHEWS ASIAN GROWTH AND INCOME FUND

    SIX-MONTH PERIOD ENDED
JUNE 30, 2007 (UNAUDITED)		     YEAR ENDED DECEMBER 31, 2006  
     SHARES     AMOUNT     SHARES     AMOUNT  

Shares sold

    8,017,575     $ 156,950,522     18,050,785     $ 332,587,165  

Shares issued through reinvestment of distributions

    3,651,056       73,167,152     12,110,960       221,323,648  

Shares redeemed

    (9,251,802 )     (180,214,019 )   (19,778,530 )     (363,071,397 )
                            

Net increase

    2,416,829     $ 49,903,655     10,383,215     $ 190,839,416  
                            

MATTHEWS ASIAN TECHNOLOGY FUND

    SIX-MONTH PERIOD ENDED
JUNE 30, 2007 (UNAUDITED)		     YEAR ENDED DECEMBER 31, 2006  
     SHARES     AMOUNT     SHARES     AMOUNT  

Shares sold

    6,535,630     $ 52,985,185     14,633,551     $ 103,517,457  

Shares redeemed

    (4,897,221 )     (39,455,266 )   (5,954,824 )     (40,991,923 )
                            

Net increase

    1,638,409     $ 13,529,919     8,678,727     $ 62,525,534  
                            

MATTHEWS CHINA FUND

    SIX-MONTH PERIOD ENDED
JUNE 30, 2007 (UNAUDITED)		     YEAR ENDED DECEMBER 31, 2006  
     SHARES     AMOUNT     SHARES     AMOUNT  

Shares sold

    18,080,762     $ 471,045,343     22,977,777     $ 440,794,850  

Shares issued through reinvestment of distributions

    —         —       240,493       5,358,057  

Shares redeemed

    (14,170,698 )     (367,847,619 )   (9,567,298 )     (172,225,029 )
                            

Net increase

    3,910,064     $ 103,197,724     13,650,972     $ 273,927,878  
                            

MATTHEWS INDIA FUND

    SIX-MONTH PERIOD ENDED
JUNE 30, 2007 (UNAUDITED)		     PERIOD ENDED DECEMBER 31, 2006  
     SHARES     AMOUNT     SHARES     AMOUNT  

Shares sold

    13,422,692     $ 216,267,533     53,857,909     $ 701,356,793  

Shares redeemed

    (13,651,361 )     (211,205,234 )   (17,676,,868 )     (219,068,675 )
                            

Net increase (decrease)

    (228,669 )   $ 5,062,299     36,181,041     $ 482,288,118  
                            

MATTHEWS JAPAN FUND

    SIX-MONTH PERIOD ENDED
JUNE 30, 2007 (UNAUDITED)		     YEAR ENDED DECEMBER 31, 2006  
     SHARES     AMOUNT     SHARES     AMOUNT  

Shares sold

    4,683,328     $ 81,993,109     11,061,406     $ 204,528,465  

Shares redeemed

    (4,263,529 )     (73,786,185 )   (14,950,387 )     (264,446,149 )
                            

Net increase (decrease)

    419,799     $ 8,206,924     (3,888,981 )   $ (59,917,684 )
                            

 

88    MATTHEWS ASIAN FUNDS

JUNE 30, 2007

 

MATTHEWS KOREA FUND

    SIX-MONTH PERIOD ENDED
JUNE 30, 2007 (UNAUDITED)		     YEAR ENDED DECEMBER 31, 2006  
     SHARES     AMOUNT     SHARES     AMOUNT  

Shares sold

    4,856,224     $ 31,340,905     21,963,993     $ 145,622,702  

Shares issued through reinvestment of distributions

    —         —       5,136,303       31,793,720  

Shares redeemed

    (9,340,057 )     (57,366,467 )   (30,733,410 )     (197,197,960 )
                            

Net decrease

    (4,483,833 )   $ (26,025,562 )   (3,633,114 )   $ (19,781,538 )
                            

The Funds assess a redemption fee of 2.00% of the total redemption proceeds if you sell or exchange your shares within 90 calendar days after purchasing them. The redemption fee is paid directly to the Funds and is designed to discourage frequent short-term trading and to offset transaction costs associated with such trading of Fund shares. For purposes of determining whether the redemption fee applies, the shares that have been held the longest will be redeemed first. The redemption fee does not apply to redemptions of shares held in certain omnibus accounts and retirement plans that cannot currently implement the redemption fee. While these exceptions exist, the Funds are not accepting any new accounts which cannot implement the redemption fee. In addition, the Funds are actively discussing a schedule for implementation of the fee with these providers. For more information on this policy, please see the Funds’ prospectus. The redemption fees returned to the assets of the Funds are stated in the Statements of Changes in Net Assets.

 

2. INVESTMENT ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES

The Advisor, a registered investment advisor under the Investment Advisers Act of 1940, as amended, provides the Funds with investment management services. As compensation for these services, the Advisor charges the Funds an annual investment management fee payable at the end of each calendar month based on each Fund’s respective average daily net asset value for the month. The fee is charged at a rate of 0.75% of average daily net assets if assets in the Trust complex (the “complex”) are up to $2 billion. The rate is reduced to 0.70% of average daily net assets between $2 billion and $5 billion and reduced to 0.65% of average daily net assets over $5 billion. Additionally, the Advisor has voluntarily agreed to reduce its fees to 0.6834% of average daily net assets between $3 billion and $4 billion and to 0.667% of average daily net assets between $4 billion and $5 billion.

Certain officers and Trustees of the Funds are also officers and directors of the Advisor. All officers serve without direct compensation from the Funds. The Funds paid the Independent Trustees $168,000 in aggregate for regular compensation during the six-month period ended June 30, 2007; no special compensation was paid during this period. Investment advisory fees charged and waived, for the six-month period ended June 30, 2007, were as follows:

 

     VOLUNTARY EXPENSE
LIMITATION		     GROSS
ADVISORY FEES		   

ADVISORY FEES WAIVED
PER MANAGEMENT

FEE SCHEDULE

  

Matthews Asia Pacific Fund

    1.90 %   $ 1,620,113    $ (13,730 )

Matthews Asia Pacific Equity Income Fund

    1.50 %     158,335      (1,333 )

Matthews Pacific Tiger Fund

    1.90 %     11,673,336      (98,818 )

Matthews Asian Growth and Income Fund

    1.90 %     7,267,295      (61,531 )

Matthews Asian Technology Fund

    2.00 %     508,576      (4,306 )

Matthews China Fund

    2.00 %     4,009,787      (33,883 )

Matthews India Fund

    2.00 %     2,414,249      (20,422 )

Matthews Japan Fund

    2.00 %     986,657      (8,371 )

Matthews Korea Fund

    2.00 %     758,569      (6,424 )

 

800.789.ASIA [2742] www.matthewsfunds.com    89

NOTES TO FINANCIAL STATEMENTS

 

    ADVISORY FEES WAIVED
IN EXCESS OF THE
EXPENSE LIMITATION		     ADVISORY FEES
RECOVERED THAT WERE
PREVIOUSLY WAIVED		   NET ADVISORY FEES

Matthews Asia Pacific Fund

   $ —       $ —     $ 1,606,383

Matthews Asia Pacific Equity Income Fund

     (8,623 )     —       148,379

Matthews Pacific Tiger Fund

     —         —       11,574,518

Matthews Asian Growth and Income Fund

     —         —       7,205,764

Matthews Asian Technology Fund

     —         —       504,270

Matthews China Fund

     —         —       3,975,904

Matthews India Fund

     —         —       2,393,827

Matthews Japan Fund

     —         —       978,286

Matthews Korea Fund

     —         —       725,145

The investment advisory agreements provide that any reductions made by the Advisor in its fees, in the event a Fund’s expenses exceed the voluntary expense limitation, are subject to reimbursements by such Fund within the following three years provided that such Fund is able to effect such reimbursements and remain in compliance with applicable expense limitations. At June 30, 2007, the Matthews Asia Pacific Equity Income Fund had $38,783 available for recoupment by the Advisor.

The Funds have an administration shareholder servicing agreement, pursuant to which, the Funds reimburse the Advisor for administration and shareholder servicing activities based on each Fund’s average daily net assets. The fee is charged at a rate of 0.25% of average daily net assets if assets in the complex are up to $2 billion. The rate is reduced to 0.20% of average daily net assets between $2 billion and $5 billion, reduced to 0.15% of average daily net assets are over $5 billion and reduced 0.125% of average daily net assets over $7.5 billion. Additionally, the Advisor has voluntarily agreed to reduce its fee rate for assets between $3 and $4 billion to 0.1834% of average daily net assets, and for assets between $4 and $5 billion to 0.1667% of average daily net assets.

Administration and shareholder servicing fees charged and waived, for the six-months period ended June 30, 2007, were as follows:

 

    GROSS
ADMINISTRATION
& SHAREHOLDER
SERVICING FEES		   ADMINISTRATION
& SHAREHOLDER
SERVICING FEES
WAIVED		     NET
ADMINISTRATION
& SHAREHOLDER
SERVICING FEES		   NET FEES
IN BASIS
POINTS		  

Matthews Asia Pacific Fund

   $ 440,929   $ (13,730 )   $ 427,199   0.18 %

Matthews Asia Pacific Equity Income Fund

     43,008     (1,333 )     41,675   0.18 %

Matthews Pacific Tiger Fund

     3,176,000     (98,817 )     3,077,183   0.18 %

Matthews Asian Growth and Income Fund

     1,977,346     (61,531 )     1,915,815   0.18 %

Matthews Asian Technology Fund

     138,374     (4,305 )     134,069   0.18 %

Matthews China Fund

     1,090,380     (33,883 )     1,056,497   0.18 %

Matthews India Fund

     656,707     (20,421 )     636,286   0.18 %

Matthews Japan Fund

     268,615     (8,370 )     260,245   0.18 %

Matthews Korea Fund

     206,412     (6,424 )     199,988   0.18 %

The Funds bear a portion of the fees paid to certain services providers (exclusive of the Funds’ transfer agent) which provide transfer agency and shareholder servicing to certain shareholders. Fees accrued to pay to such service providers for the six-month period ended June 30, 2007 are reflected in the Statement of Operations as follows:

 

90    MATTHEWS ASIAN FUNDS

JUNE 30, 2007

 

     TRANSFER AGENT FEES    ADMINISTRATION &
SHAREHOLDER SERVICING FEES		    TOTAL

Matthews Asia Pacific Fund

    $ 250,703    $ 125,352    $ 376,055

Matthews Asia Pacific Equity Income Fund

      6,161      3,081      9,242

Matthews Pacific Tiger Fund

      1,418,193      709,096      2,127,289

Matthews Asian Growth and Income Fund

      1,303,851      651,926      1,955,777

Matthews Asian Technology Fund

      81,235      40,618      121,853

Matthews China Fund

      651,448      325,724      977,172

Matthews India Fund

      398,845      199,423      598,268

Matthews Japan Fund

      206,925      103,463      310,388

Matthews Korea Fund

      117,315      58,658      175,973

PFPC Inc. (“PFPC”), an indirect wholly-owned subsidiary of The PNC Financial Services Group, serves as the Trust’s Administrator and, in that capacity, performs various administrative and accounting services for each Fund. PFPC also serves as the Trust’s Transfer Agent, dividend disbursing agent and registrar. An officer of PFPC serves as Assistant Treasurer to the Trust. Total fees accrued by the Funds for PFPC Transfer Agency services for the six-month period ended June 30, 2007 were $560,724. Beginning September 1, 2005, PFPC agreed to waive a portion of its Administration & Accounting services fees. The waiver is $6,372 annually and is allocated evenly across the Funds. Total fees accrued by the Funds and waived by PFPC for Administration & Accounting services for the six-month period ended June 30, 2007 were as follows:

 

    GROSS ADMINISTRATION &
ACCOUNTING FEES		   ADMINISTRATION &
ACCOUNTING FEES WAIVED		     NET ADMINISTRATION
& ACCOUNTING FEES

Matthews Asia Pacific Fund

   $ 55,136   $ (708 )   $ 54,428

Matthews Asia Pacific Equity Income Fund

     5,164     (708 )     4,456

Matthews Pacific Tiger Fund

     395,611     (708 )     394,903

Matthews Asian Growth and Income Fund

     246,290     (708 )     245,582

Matthews Asian Technology Fund

     17,260     (708 )     16,552

Matthews China Fund

     134,683     (708 )     133,975

Matthews India Fund

     81,929     (708 )     81,221

Matthews Japan Fund

     33,683     (708 )     32,975

Matthews Korea Fund

     25,807     (708 )     25,099

The Bank of New York serves as custodian to the Trust. PFPC Distributors, Inc. (the “Distributor”) serves as the Fund’s Distributor pursuant to an Underwriting Agreement.

 

3. INVESTMENT TRANSACTIONS

Investment transactions for the six-month period ended June 30, 2007, excluding short-term investments from unaffiliated and affiliated issues (as defined in the Act, as amended, as ownership of 5% or more of the outstanding voting shares) were as follows:

 

     AFFILIATED
PURCHASES		    AFFILIATED
PROCEEDS
FROM SALES		    UNAFFILIATED
PURCHASES		    UNAFFILIATED
PROCEEDS
FROM SALES

Matthews Asia Pacific Fund

    $ —      $ —      $ 135,194,889    $ 144,730,852

Matthews Asia Pacific Equity Income Fund

      —        —        36,347,914      4,313,070

Matthews Pacific Tiger Fund

      31,808,764      3,845,772      496,280,501      657,724,889

Matthews Asian Growth and Income Fund

      14,423,000      —        244,591,992      331,070,917

Matthews Asian Technology Fund

      —        —        49,449,192      36,240,569

Matthews China Fund

      —        —        254,397,396      155,689,399

Matthews India Fund

      —        —        145,487,782      140,503,375

Matthews Japan Fund

      —        —        76,215,314      68,730,759

Matthews Korea Fund

      —        —        29,001,649      54,479,766

 

800.789.ASIA [2742] www.matthewsfunds.com    91

NOTES TO FINANCIAL STATEMENTS

 

4. HOLDINGS OF 5% VOTING SHARES OF PORTFOLIO COMPANIES

The Act defines “affiliated companies” to include investments in portfolio companies in which a fund owns 5% or more of the outstanding voting shares. During the period January 1, 2007 through June 30, 2007, the Funds below held 5% or more of the outstanding voting shares of the noted portfolio companies. During this period, other Funds in the Trust may also have held voting shares of the issuers at levels below 5%.

 

MATTHEWS PACIFIC TIGER FUND

Name of Issuer:

   

SHARES
HELD AT
DEC. 31,

2006

    SHARES
PURCHASED		     SHARES
SOLD		   

SHARES
HELD AT
JUN. 30,

2007

   

AFFILIATED
VALUE AT

JUN. 30,

2007

   

DIVIDEND
INCOME

JAN. 1, 2007 –
JUN. 30, 2007

Amata Corp. Public Co., Ltd.

    48,540,900    11,354,000     —      59,894,900    $ 29,318,575    $ 346,664

Dickson Concepts International, Ltd.

    28,334,900    —       —      28,334,900      32,976,211      502,169

Dynasty Fine Wines Group, Ltd.

    77,862,000    —       —      77,862,000      31,765,370      119,497

Giordano International, Ltd.*

    81,203,000    —       81,203,000    —        —        —  

Hanmi Pharmaceutical Co., Ltd.

    373,370    48,763     —      422,133      64,883,786      250,786

Hyflux, Ltd.

    37,706,187    —       2,877,000    34,829,187      66,666,352      335,719

Integrated Distribution Services Group, Ltd.*

    17,488,000    —       5,655,000    11,833,000      —        —  

SA SA International Holdings, Ltd.

    84,468,000    —       84,468,000    —        —        —  

Titan Industries, Ltd.*

    2,229,554    —       370,210    1,859,344      —        —  

Travelsky Technology, Ltd. H Shares

    20,406,000    20,406,000 †   —      40,812,000      34,918,186      584,914
                        

Total Affiliates

               $ 260,528,480    $ 2,139,749
                        

MATTHEWS ASIAN GROWTH AND INCOME FUND

Name of Issuer:

   

SHARES
HELD AT
DEC. 31,

2006

    SHARES
PURCHASED		     SHARES
SOLD		   

SHARES
HELD AT
JUN. 30,

2007

   

AFFILIATED
VALUE AT

JUN. 30,

2007

   

DIVIDEND
INCOME

JAN. 1, 2007 –
JUN. 30, 2007

I-CABLE Communications, Ltd.

    114,721,000    14,423,000     —      129,144,000    $ 27,417,004    $ 825,914
                        

Total Affiliates

               $ 27,417,004    $ 825,914
                        

MATTHEWS CHINA FUND

Name of Issuer:

   

SHARES
HELD AT
DEC. 31,

2006

    SHARES
PURCHASED		     SHARES
SOLD		   

SHARES
HELD AT
JUN. 30,

2007

   

AFFILIATED
VALUE AT
JUN. 30,

2007

    DIVIDEND
INCOME
JAN. 1, 2007 –
JUN. 30, 2007

Kingdee International Software Group Co., Ltd.

    23,378,000    —       —      23,378,000    $ 21,167,925    $ 194,445

Lianhua Supermarket Holdings Co., Ltd. H Shares

    10,981,000    —       —      10,981,000      15,644,611      100,454
                        

Total Affiliates

               $ 36,812,536    $ 294,899
                        
* Issuer was not an affiliated company as of June 30, 2007.
† Increase due to 2-for-1 stock split during the period.

 

92    MATTHEWS ASIAN FUNDS

MATTHEWS ASIAN FUNDS

BOARD OF TRUSTEES

Independent Trustees:

Geoffrey H. Bobroff, Chairman

Robert K. Connolly

Rhoda Rossman

Toshi Shibano

Jon Zeschin

Interested Trustee:1

G. Paul Matthews

OFFICERS

Mark W. Headley

Andrew T. Foster

Shai Malka

John P. McGowan

Manoj K. Pombra

INVESTMENT ADVISOR

Matthews International Capital Management, LLC

Four Embarcadero Center, Suite 550

San Francisco, CA 94111

800-789-ASIA [2742]

ACCOUNT SERVICES

PFPC Inc.

P.O. Box 9791

Providence, RI 02940

800-789-ASIA [2742]

 

1

As defined under the Investment Company Act of 1940, as amended.

LOGO

Item 2. Code of Ethics.

Not applicable.

 

Item 3. Audit Committee Financial Expert.

Not applicable.

 

Item 4. Principal Accountant Fees and Services.

Not applicable.

 

Item 5. Audit Committee of Listed registrants.

Not applicable.

 

Item 6. Schedule of Investments.

Schedule of Investments in securities of unaffiliated issuers as of the close of the reporting period is included as part of the report to shareholders filed under Item 1 of this form.

 

Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies.

Not applicable.

 

Item 8. Portfolio Managers of Closed-End Management Investment Companies.

Not applicable.

Item 9. Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers.

Not applicable.

 

Item 10. Submission of Matters to a Vote of Security Holders.

There have been no material changes to the procedures by which the shareholders may recommend nominees to the registrant’s board of directors, where those changes were implemented after the registrant last provided disclosure in response to the requirements of Item 407(c)(2)(iv) of Regulation S-K (17 CFR 229.407) (as required by Item 22(b)(15) of Schedule 14A (17 CFR 240.14a-101)), or this Item.

Item 11. Controls and Procedures.

 

  (a) The registrant’s principal executive and principal financial officers, or persons performing similar functions, have concluded that the registrant’s disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940, as amended (the “1940 Act”) (17 CFR 270.30a-3(c))) are effective, as of a date within 90 days of the filing date of the report that includes the disclosure required by this paragraph, based on their evaluation of these controls and procedures required by Rule 30a-3(b) under the 1940 Act (17 CFR 270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934, as amended (17 CFR 240.13a-15(b) or 240.15d-15(b)).

 

  (b) There were no changes in the registrant’s internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act (17 CFR 270.30a-3(d)) that occurred during the registrant’s second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

Item 12. Exhibits.

 

(a)(1)   Not applicable.
(a)(2)   Certifications pursuant to Rule 30a-2(a) under the 1940 Act and Section 302 of the Sarbanes-Oxley Act of 2002 are attached hereto.
(a)(3)   Not applicable.
(b)   Certifications pursuant to Rule 30a-2(b) under the 1940 Act and Section 906 of the Sarbanes-Oxley Act of 2002 are attached hereto.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

(registrant) Matthews International Funds  
By (Signature and Title)*  

/s/ Mark W. Headley

  
  Mark W. Headley, President  
  (principal executive officer)  
Date September 4, 2007  

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

By (Signature and Title)*  

/s/ Mark W. Headley

  
  Mark W. Headley, President  
  (principal executive officer)  
Date September 4, 2007  
By (Signature and Title)*  

/s/ Shai Malka

  
  Shai Malka, Treasurer  
  (principal financial officer)  
Date September 4, 2007  

*

Print the name and title of each signing officer under his or her signature.