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Southeast Asian Countries on the Comeback

Jason Stipp

Jason Stipp: I'm Jason Stipp with Morningstar. We're out in San Francisco visiting with Matthews Asia Funds, and I'm here with Richard Gao. He's a Fund Manager on the Matthews Pacific Tiger and the Matthews China Fund. He's here to tell us a little bit about this increasingly important area of the world, and also where he is finding opportunity.

Richard, thanks for joining us.

Richard Gao: Thank you.

Stipp: So the first question I wanted to ask you is, the Matthews Pacific Tiger Fund is a little bit more wide ranging than lot of the funds in its category, both on a regional basis and also on a market cap basis.

Earlier this year in your report to shareholders you mentioned that you had been finding some opportunity in Southeast Asian markets. They presented some opportunities for what you saw is more robust and sustainable growth than maybe some other areas in Asia where growth was moderating. Can you expand a little bit on the types of regions and also maybe the types of companies where you've been finding this opportunity in this area?

Gao: Sure. When people think about Asia, they tend to focus mostly on China and India and Korea and Singapore, etc. Southeast Asia is the place where investors tend to ignore. Naturally, there's been a lot of positive things changing in the Southeast Asian countries.

This area has been one of the hardest hit during the Asian financial crisis in 1997. In the early 1990s, the Southeast Asian countries have undergone through a process of overinvesting in lot of areas in their countries. So they have been building up debts, foreign debts, and also expanding in terms of market share rather than focusing on the company profitability. So as a result of that you see in 1997 Thailand is the first country that went through a bubble burst, and then it triggered the whole Asian financial crisis.

And over the past years, the Southeast Asian countries have been learning a hard lesson from them and then trying to recover, and they have been pretty successful I would say in terms of recovery. And they have been cutting down the debt levels very substantially and improving the corporate balance sheet, and corporate earnings have also been growing very fast.

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And that is one of the key reasons why the recovery of the Southeast Asian countries has been very strong after the global financial crisis in the past two years. So you see that the fundamentals of the Southeast Asian countries have changed very positively over the past years, and this is where we are seeing a lot of opportunities.

Take the example of Indonesia. This is a country that average income growth has been one of the fastest in the region. And also their companies in the country have been lowering down the debt, and they are much more solid now, and we are seeing a lot of growth opportunities in countries like Indonesia, and Vietnam is also a country that we see lot of good growth opportunities, especially given their strong demographic. This is a country where the average age of the population is only 27 years old, and there are lot of growth opportunities in a country like Vietnam.

Stipp: So it sounds like the fundamentals certainly in these countries and the prospects that you're seeing, looking forward are very good.

But what about from a valuation front. So, a lot of times when the fundamentals look very good, the prices of the securities you might find, they have that priced in. Are you finding that, that you're also able to find good bargains in these regions or what are you looking for on the valuation front?

Gao: Right, Asian region overall so far this year, the performance has been quite diverse. On the one hand, you are seeing China and Taiwan and Hong Kong, which is down so far this year about 5% to 10%. On the other hand, you have markets like India, Indonesia, Malaysia, their market is up between 15% to 20% this year.

In terms of valuation overall, Asia, ex-Japan region, is currently around 13 to 14 times, which is close to the historical average. But if you look at individual countries, if you look at China, for example, the valuation for China is currently below their historical average at around 11 to 12 times. And there I think the market has in some way overreacted to some of the concerns that China will be slowing down very rapidly this year.

So, for example, in the property area, we are seeing some good interesting investment opportunities starting to come out because of a very sharp decline in the property sector in China.

For example, on average the sector went down by more than 15% to 20% in the property-related stuffs. And the lot of property companies from China, you are seeing quite attractive valuation now, so we are looking quite closely to some of that property areas in China now.