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By Jeremy Glaser | 04-26-2010 02:40 PM

Household Spending Will Drive Asian Dividend Growth

Asia may have great exporters, but investing in firms that focus on domestic demand is a better way to capitalize on long-term growth trends, according to Matthews Asia's Jesper Madsen.

Jeremy Glaser: There are a ton of options out there, so it looks like you have slices of differing sectors, different regions across the entire market capitalization.

How do you narrow it down into companies that are going to have a solid dividend and might not just be paying out for the sake of it or recklessly?

Jesper Madsen: The way we look at it from a portfolio perspective, because obviously 5,000 companies, that's a large universe to work with, so we narrow it down quite quickly, actually.

There are certain business models that we as bottom-up investors would tend to focus on. At Matthews, what we tend to tilt all our portfolios on, what we focus on, is what takes place in Asia for the Asian households.

We're not overly intrigued or interested in the exporting sector, again, because what are you doing? You're tying yourself back to the U.S. Diversification is lost by going to the exporting sectors. Even though they have great exporters obviously in Asia, it's not as interesting as looking at more of the structural and longer-term trend of the rising household wealth.

We look at the company level for strong cash flows, these cash flows growing in excess of capital needed to reinvest into the business. That gives you free cash flow that can then be paid out as dividends.

We look at very strong balance sheets. Again, for the most part Asia is very under-geared. They went through the Asian crisis back in the late '90s, and that has basically scarred I would say management teams and made them somewhat conservative, sometimes overly conservative, about keeping cash on the balance sheets and keeping pretty light balance sheets.

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