Matthews Asian Funds
F O R M O R E I N F O R M A T I O N A B O U T
M A T T H E W S A S I A N F U N D S
8 0 0 . 7 8 9 . A S I A [ 2 7 4 2 ]
w w w . m a t t h e w s f u n d s . c o m THIRD QUARTER REPORT
MAY 31, 2004
Pacific Tiger Fund
Asian Growth and Income Fund
Korea Fund
China Fund
Japan Fund
Asian Technology Fund
Asia Pacific Fund
©2004 Matthews International Capital Management, LLC
MAT3Q-0504-100M-FST
Free e-mail communications on Asia and the Funds
are available at www.matthewsfunds.com
n Asia Weekly
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n Occasional Fund Updates
CONTENTS 2 Message to Shareholders 5 Redemption Fee Policy and Investor Disclosure 6 Matthews Pacific Tiger Fund 10 Matthews Asian Growth and Income Fund 16 Matthews Korea Fund 20 Matthews China Fund 24 Matthews Japan Fund 28 Matthews Asian Technology Fund 32 Matthews Asia Pacific Fund
M E S S A G E T O S H A R E H O L D E R S
FROM THE INVESTMENT ADVISOR
Dear Shareholder,
The three-month period from March 1 to May 31, 2004, was a volatile period for Asian equity markets. During the quarter, investors digested the gains of the prior year, weighed the potential impact of rising U.S. interest rates, and mulled over an increase in raw material prices. During this period, Japanese stocks saw strong gains, while most other Asian markets declined. Of the seven Matthews Asian Funds, six saw declines while one, the Matthews Japan Fund, showed a gain for the period.
Overall, the Asian markets have seen substantial gains from the lows of last spring, and a period of consolidation and digestion was perhaps to be expected. The recent correction in Asian markets was led in part by concerns about the sustainability of recent strong growth in China, while confidence in Japan’s nascent recovery has continued to improve. The authorities in China have signaled that they would like to see more-controlled growth in some sectors, while in Japan no such concerns have been expressed.
There has been much debate in recent weeks as to whether the Chinese economy is likely to experience a significant slowing of economic growth as a result of policy actions by the central government. In the last several years, China has reported annualized real economic growth of 8% to 9% without any evidence of overheating or serious imbalances. In recent months, however, the government has indicated that it now sees signs of excess in some industries and in order to curb such pressures, it has introduced a series of policy measures to combat overheating. Those measures have focused on limiting lending to sectors such as cement, steel, aluminum and construction, while at the same time increasing the reserve requirements for all banks to slow credit growth. In prior periods, such methods have been successful in slowing growth; but in an economy that is changing as rapidly as China’s, there is always uncertainty as to how particular policy changes will translate to the real economy. We do not believe that there is any particular reason to expect the outcome to be dramatically different this time. We remain optimistic that the long-term growth prospects for China are strong, whatever the short term may bring, and we continue to focus our efforts in identifying, from the bottom up, companies that can participate in and lead that long-term growth. For a region that has in recent years relied heavily on growing demand from China as its perceived “engine” of growth, the suggestion that Chinese economic growth might slow is of concern. The
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nascent recovery in Japan, therefore, is a particularly welcome prospect for the region and offers a possible second piston for the region.
Recent evidence of economic recovery in Japan includes signs of improved sentiment among consumers, a reduction in non-performing loans in the banking system, higher-than-expected short-term GDP numbers, and the performance of the Japanese stock market itself. Investors are naturally wary of another potential “false dawn” in Japan, and we would, as always, caution against excessive short-term optimism, but we do see signs of long-term improvement in Japan and have received positive feedback from recent company visits suggesting improving confidence at the company management level.
Following the corrections that have taken place in most non-Japan Asian markets, we are of the opinion that valuations are once again undemanding for many publicly traded companies in the region. The Funds have continued to focus on seeking long-term growth through investment in companies in a variety of sectors, but tend to have a higher weighting in domestically oriented companies than do most benchmarks. This is primarily because the investment advisor believes that such companies have particularly strong long-term prospects as living standards continue to show long-term improvement. While many countries in Asia have historically adopted export-driven economic models, we believe that for the region as a whole to sustain its recent progress, it is inevitable that more emphasis be placed on domestic consumption in general and the service sector in particular.
Our frequent investment trips to Asia continue to reinforce our belief that the region is continuing to reduce barriers to trade and investment between countries within the area as well as with the rest of the world, and that these reduced barriers are having a real impact at the individual company level. Merger-and-acquisition activity has continued to gather pace, particularly in China, and privatizations of major corporations and their listings on overseas and domestic stock exchanges remains a growing feature of financial reform in the region.
For the region outside of Japan and China, recent performance has been mixed, with markets giving up some of their gains of the past year in a period of correction and consolidation. Indian markets reacted in a particularly volatile fashion to political events
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M E S S A G E S T O S H A R E H O L D E R S
during the quarter, and elections around the region have caused some uncertainty in Indonesia and Taiwan. The recent evidence of economic recovery around the globe has had a positive impact on regional trade, but increases in some commodity prices, including oil, have had a negative impact on expectations for profit margins in some industries. We have always believed that for most investors, a diversified approach to the region is appropriate.
In closing, we invite shareholders to visit the Matthews Asian Funds’ website, www.matthewsfunds.com, where various free e-mail communications on Asia and the Funds are available on a weekly, monthly and quarterly basis.
Thank you for your continued support.
G. Paul Matthews
Chairman and Chief Investment Officer
Matthews International Capital Management, LLC
Mark W. Headley
President and Portfolio Manager
Matthews International Capital Management, LLC4 MATTHEWS ASIAN FUNDS
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REDEMPTION FEE POLICY
The Funds assess a redemption fee of 2.00% of the total redemption proceeds if you sell your shares within 90 days after purchasing them. The redemption fee is paid directly to the Funds and is designed to offset transaction costs associated with short-term trading of Fund shares. For more information about 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 800-789-ASIA [2742] or visit www.matthewsfunds.com.
Investment Risk: 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.
Fund Holdings: The Fund holdings shown in this report are as of May 31, 2004. Holdings are subject to change at any time, so holdings shown in this report may not reflect current Fund holdings.
This report is submitted for the general information of the shareholders of the Matthews Asian Funds. It is authorized for distribution only if preceded or accompanied by a current Matthews Asian Funds prospectus. Additional copies of the prospectus may be obtained by calling 800-789-ASIA [2742] or can be downloaded from the Funds’ website at www.matthewsfunds.com. Please read the prospectus carefully before you invest or send money, as it explains the risks, fees and expenses of investing in the Funds.
The Matthews Asian Funds are distributed by PFPC Distributors, Inc., 760 Moore Road, King of Prussia, PA 19406.
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M A T T H E W S P A C I F I C T I G E R F U N D
CO-PORTFOLIO MANAGERS SYMBOL: MAPTX
G. Paul Matthews and Mark W. Headley
The Matthews Pacific Tiger Fund invests at least 80% of its assets 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 and Thailand.
PORTFOLIO MANAGER COMMENTARY
The Matthews Pacific Tiger Fund has seen a fairly sharp consolidation in recent months following its very strong gains of the last year. For the fiscal quarter ended May 31, 2004, the Fund lost 6.49%, versus a loss of 9.81% for the MSCI All Country Far East Free ex-Japan Index. A sharp pullback across most Asian markets was driven by concerns over China’s economy, rising oil prices and related uncertainties in the Middle East, as well as the specter of rising interest rates. After the rally of the last year, such concerns were almost bound to encourage profit-taking. While we are comfortable with the overall environment, it is unlikely that these concerns can be resolved in a short period of time.
The Fund saw negative returns in every market in which it participates, but the broadest losses were in China/Hong Kong companies. By sector, only consumer/retail-related companies managed a positive contribution. Financials, information technology and telecoms all suffered significant losses. Valuations that might have been a bit stretched at the beginning of the year have been reduced to levels that we believe are attractive.
The outlook for earnings can never be assured. There are many issues, such as the attempt to slow the Chinese economy, that may take many months to clarify. We are encouraged by the continued intra-regional activity that reduced barriers to trade and services are allowing. The development of regionally diversified business organizations may bode well for a more stable and diversified future for many of the companies that today operate primarily in their home market.
Overall, the portfolio continues to concentrate on our core areas of interest: consumer/retail, financials and technology of all sorts. Our emphasis on companies that make their money in the Asia region versus global operations remains in place. The Fund is fully invested.
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FUND HIGHLIGHTS Fund Inception: 9/12/94--------------------------------------------------------------------------------------------------------- AVERAGE ANNUAL RETURNS AS OF MAY 31, 2004* --------------------------------------------------------------------------------------------------------- SINCE 3 MTHS 1 YR 3 YRS 5 YRS INCEPTION --------------------------------------------------------------------------------------------------------- Matthews Pacific Tiger Fund -6.49% 45.97% 13.73% 11.38% 4.72% MSCI All Country Far East Free ex-Japan Index(1) -9.81% 39.22% 10.15% 1.20% -2.94% Lipper Pacific ex-Japan Funds Category Average(2) -9.23% 38.54% 9.90% 4.98% -1.03%+ --------------------------------------------------------------------------------------------------------- + From 8/31/94 --------------------------------------------------------------------------------------------------------- MATTHEWS PACIFIC TIGER FUND AVERAGE ANNUAL RETURNS AS OF*: --------------------------------------------------------------------------------------------------------- SINCE 1 YR 3 YRS 5 YRS INCEPTION --------------------------------------------------------------------------------------------------------- March 31, 2004 81.45% 19.10% 18.59% 5.32% June 30, 2004 37.88% 14.68% 6.83% 4.64% --------------------------------------------------------------------------------------------------------- *Assumes reinvestment of all dividends. Past performance is not indicative of future results. Unusually high returns may not be sustainable. ------------------------------------------------------- OPERATING EXPENSES(3) ------------------------------------------------------- For nine months ended 5/31/04, annualized** 1.49% For Fiscal Year 2003 (ended 8/31/03)*** 1.75% ------------------------------------------------------- **Unaudited ***Audited ------------------------------------------------------- PORTFOLIO TURNOVER(4) ------------------------------------------------------- For nine months ended 5/31/04, annualized** 15.48% For Fiscal Year 2003 (ended 8/31/03)*** 28.24% ------------------------------------------------------- ------------------------------------- COUNTRY ALLOCATION++ ------------------------------------- China/Hong Kong 37% South Korea 25% Singapore 13% Thailand 8% India(1) 6% Taiwan 4% Indonesia 4% Philippines less than 1% Cash 1% ------------------------------------- ------------------------------------- SECTOR ALLOCATION++ ------------------------------------- Financials 29% Consumer Discretionary 17% Information Technology 17% Consumer Staples 13% Telecommunication Services 11% Health Care 5% Utilities 3% Industrial 3% Cash 1% ------------------------------------- ------------------------------------- MARKET CAP EXPOSURE++ ------------------------------------- Large cap (over $5 billion) 26% Mid cap ($1-$5 billion) 52% Small cap (under $1 billion) 21% Cash 1% ------------------------------------- ++ Percentage figures are rounded. -------------------------------------------------------------------------- NAV ASSETS REDEMPTION FEE 12b-1 FEES -------------------------------------------------------------------------- $13.12 $594.9 million 2.00% within 90 days None --------------------------------------------------------------------------All data is as of May 31, 2004, unless otherwise noted.
1 The MSCI All Country Far East Free ex-Japan Index is an unmanaged capitalization-weighted index of the stock markets of Hong Kong, Taiwan, Singapore, Korea, Indonesia, Malaysia, Philippines, Thailand and China that excludes securities not available to foreign investors. As of May 31, 2004, 6.29% of the assets in the Matthews Pacific Tiger Fund were invested in India, which is not included in the MSCI All Country Far East Free ex-Japan Index. Source: Bloomberg. 2 As of 5/31/04, the Lipper Pacific ex-Japan Funds Category Average consisted of 61 funds for the three-month period, 58 funds for the one-year period, 54 funds for the three-year period, 41 funds for the five-year period, and 15 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 Includes management fee, shareholder services fees and other expenses. Matthews Asian Funds do not charge 12b-1 fees. 4 The lesser of fiscal year-to-date purchase costs or sales proceeds divided by the average monthly market value of long-term securities.800.789.ASIA [2742] www.matthewsfunds.com 7
M A T T H E W S P A C I F I C T I G E R F U N D
SCHEDULE OF INVESTMENTS (Unaudited)
EQUITIES: 98.68%*SHARES VALUE ============================================================================ CHINA/HONG KONG: 37.17% Dah Sing Financial Group 3,653,600 $24,610,785 Giordano International, Ltd. 39,929,000 24,462,846 Swire Pacific, Ltd. A Shares 2,836,000 18,284,684 PICC Property and Casualty Co., Ltd. H Shares ** 35,408,000 13,969,848 PCCW, Ltd. ** 18,878,000 12,837,397 BYD Co., Ltd. H Shares 3,407,500 11,913,724 Travelsky Technology, Ltd. H Shares 17,468,000 11,654,448 Shangri-La Asia, Ltd. 11,176,000 10,969,656 Cosco Pacific, Ltd. 7,484,000 10,370,572 Lenovo Group, Ltd. 32,304,000 10,154,711 Hang Lung Group, Ltd. 7,114,000 9,675,310 Television Broadcasts, Ltd. 2,114,700 9,306,536 Huaneng Power International, Inc. ADR 229,000 8,518,800 Sa Sa International Holdings, Ltd. 22,582,000 8,402,443 China Pharmaceutical Group, Ltd. 24,935,000 7,518,348 China Mobile HK, Ltd. 2,533,217 7,248,071 Moulin International Holdings, Ltd. 11,174,000 7,060,900 China Mobile HK, Ltd. ADR 346,350 4,970,123 Asia Satellite Telecommunications Holdings, Ltd. 3,097,600 4,848,756 Vitasoy International Holdings, Ltd. 18,800,750 4,293,786 Total China/Hong Kong 221,071,744 ============================================================================ SHARES VALUE ============================================================================ SOUTH KOREA: 24.74% Hana Bank 1,027,777 $22,850,272 Amorepacific Corp. 113,910 19,605,095 Internet Auction Co., Ltd. ** 196,686 15,380,999 Samsung Electronics Co., Ltd. 28,253 12,611,322 Hite Brewery Co., Ltd. 171,957 11,129,712 Nong Shim Co., Ltd. 56,148 10,555,313 Pulmuone Co., Ltd. 236,540 9,725,968 Kookmin Bank ** 279,080 9,702,339 Samsung Securities Co., Ltd. 472,640 8,418,627 SK Telecom Co., Ltd. 42,765 7,268,527 S1 Corp. 271,110 5,864,605 SK Telecom Co., Ltd. ADR 263,000 5,488,810 LG Home Shopping, Inc. 170,223 5,260,336 Kookmin Bank ADR 62,000 2,136,520 KT Corp. ADR 66,000 1,151,700 Total South Korea 147,150,145 ============================================================================ SINGAPORE: 13.42% DBS Group Holdings, Ltd. 2,564,750 21,262,958 Venture Corp., Ltd. 1,881,800 20,026,800 Fraser and Neave, Ltd. 2,292,550 18,197,516 Hyflux, Ltd. 12,418,125 10,587,259 Parkway Holdings, Ltd. 12,339,000 8,343,290 Great Eastern Holdings, Ltd. 212,500 1,474,350 Total Singapore 79,892,173 ============================================================================ THAILAND: 8.45% Advanced Info Service Public Co., Ltd. 10,166,000 22,050,974 Bangkok Bank Public Co., Ltd. ** 9,188,900 21,743,515 Serm Suk Public Co., Ltd. 10,671,900 6,444,702 Total Thailand 50,239,191 ============================================================================8 MATTHEWS ASIAN FUNDS
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SHARES VALUE ============================================================================ INDIA: 6.29% Hero Honda Motors, Ltd. 1,019,800 $10,159,805 Cipla, Ltd. 1,759,625 9,313,723 Infosys Technologies, Ltd. 81,966 9,131,742 HDFC Bank, Ltd. 1,085,883 8,845,675 Total India 37,450,945 ============================================================================ TAIWAN: 4.43% Hon Hai Precision Industry Co., Ltd. 5,079,300 20,804,935 Taiwan Semiconductor Manufacturing Co., Ltd. ** 3,172,189 5,520,988 Total Taiwan 26,325,923 ============================================================================ INDONESIA: 4.06% PT Ramayana Lestari Sentosa 20,845,600 9,102,391 PT Astra International, Inc. 14,291,730 8,860,102 PT Bank Central Asia 15,565,500 6,209,418 Total Indonesia 24,171,911 ============================================================================ PHILIPPINES: 0.12% SM Prime Holdings, Inc. 7,030,000 741,986 Total Philippines 741,986 ============================================================================ VALUE ============================================================================ TOTAL INVESTMENTS: 98.68% $587,044,018 (Cost $516,366,471***) CASH AND OTHER ASSETS, LESS LIABILITIES: 1.32% 7,842,757 ------------ NET ASSETS: 100.00% $594,886,775 ============================================================================* As a percentage of net assets as of May 31, 2004
** Non-income producing security
*** Cost of investments is $516,366,471 and net unrealized appreciation consists of:Gross unrealized appreciation..............$89,266,757 Gross unrealized depreciation..............(18,589,210) ----------- Net unrealized appreciation................$70,677,547 ===========ADR American Depositary Receipt
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M A T T H E W S A S I A N G R O W T H A N D I N C O M E F U N D
PORTFOLIO MANAGER SYMBOL: MACSXG. Paul Matthews
The Matthews Asian Growth and Income Fund invests at least 80% of its assets in the convertible bonds and dividend-paying equity securities of companies located in Asia, which includes China, Hong Kong, India, Indonesia, Japan, Malaysia, Philippines, Singapore, South Korea, Taiwan and Thailand.
Note: This fund is closed to new investors.
PORTFOLIO MANAGER COMMENTARY
The three-month period ended May 31, 2004, saw most Asian markets decline, with the exception of Japan, which continued its recent positive performance. The Matthews Asian Growth and Income Fund declined 2.81% over the period, while the Fund’s benchmark, the MSCI All Country Far East Free ex-Japan Index, declined 9.81%. The fact that the Fund fell less than its benchmark was due in large part to positions held in convertible bonds (approximately 23% of the portfolio at the end of the period) and in higher-yielding stocks in the region.
During the quarter, the Fund saw gains in its small positions in Japanese REITs, Singaporean securities and in one position held in Australia, but positions in all other Asian countries were down over the period. By industry, the Fund’s best performers were in the utilities sector, with the weakest in the financial and telecom sectors. Due to its investment strategies, the Fund has historically risen less than its peers during periods of strong underlying equity market performance and fallen less during weaker periods.
During the period, the Fund continued to increase its positions in Singaporean dividend-paying stocks and slightly reduce its positions in Chinese securities. While the economic headlines in the region have been dominated in recent years by reports of China’s extraordinary rise, the rest of the region has attracted less attention. However, we believe that there are a number of attractively priced companies listed and operating outside of China, and the Fund’s primary focus remains toward companies listed in China’s special administrative region of Hong Kong, along with Singapore and South Korea.10 MATTHEWS ASIAN FUNDS
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FUND HIGHLIGHTS Fund Inception: 9/12/94
---------------------------------------------------------------------------------------------------------- AVERAGE ANNUAL RETURNS AS OF MAY 31, 2004* ---------------------------------------------------------------------------------------------------------- SINCE 3 MTHS 1 YR 3 YRS 5 YRS INCEPTION ---------------------------------------------------------------------------------------------------------- Matthews Asian Growth and Income Fund -2.81% 32.41% 17.69% 18.82% 10.19% MSCI All Country Far East Free ex-Japan Index(1) -9.81% 39.22% 10.15% 1.20% -2.94% Lipper Pacific ex-Japan Funds Category Average(2) 9.23% 38.54% 9.90% 4.98% -1.03%+ ---------------------------------------------------------------------------------------------------------- + From 8/31/94 ---------------------------------------------------------------------------------------------------------- MATTHEWS ASIAN GROWTH AND INCOME FUND AVERAGE ANNUAL RETURNS AS OF*: ---------------------------------------------------------------------------------------------------------- SINCE 1 YR 3 YRS 5 YRS INCEPTION ---------------------------------------------------------------------------------------------------------- March 31, 2004 49.32% 22.02% 22.33% 10.75% June 30, 2004 30.79% 18.28% 16.71% 10.22% ---------------------------------------------------------------------------------------------------------- *Assumes reinvestment of all dividends. Past performance is not indicative of future results. Unusually high returns may not be sustainable. --------------------------------------------------------- OPERATING EXPENSES(3) --------------------------------------------------------- For nine months ended 5/31/04, annualized** 1.45% For Fiscal Year 2003 (ended 8/31/03)*** 1.69% --------------------------------------------------------- **Unaudited ***Audited --------------------------------------------------------- PORTFOLIO TURNOVER(4) --------------------------------------------------------- For nine months ended 5/31/04, annualized** 14.07% For Fiscal Year 2003 (ended 8/31/03)*** 13.33% --------------------------------------------------------- -------------------------------------- COUNTRY ALLOCATION++ -------------------------------------- China/Hong Kong 40% South Korea 20% Singapore 13% Taiwan 10% Thailand 6% Japan(1) 4% United Kingdom(1) 3% Indonesia 2% Australia(1) 2% India(1) 1% Cash 1% -------------------------------------- -------------------------------------- SECTOR ALLOCATION++ -------------------------------------- Financials 33% Telecommunication Services 22% Consumer Discretionary 14% Utilities 12% Industrials 6% Consumer Staples 5% Energy 4% Materials 2% Health Care 1% Cash 1% -------------------------------------- -------------------------------------- BREAKDOWN BY SECURITY TYPE++ -------------------------------------- Equities 72% Preferred Equities 4% International Dollar Bonds 23% Cash 1% -------------------------------------- -------------------------------------- MARKET CAP EXPOSURE++ (EQUITIES ONLY) -------------------------------------- Large cap (over $5 billion) 52% Mid cap ($1-$5 billion) 25% Small cap (under $1 billion) 22% Cash 1% -------------------------------------- ++ Percentage figures are rounded. ---------------------------------------------------------------------------- NAV Assets Redemption Fee 12b-1 Fees ---------------------------------------------------------------------------- $14.20 $993.4 million 2.00% within 90 days None ----------------------------------------------------------------------------All data is as of May 31, 2004, unless otherwise noted.
1 The MSCI All Country Far East Free ex-Japan Index is an unmanaged capitalization-weighted index of the stock markets of Hong Kong, Taiwan, Singapore, Korea, Indonesia, Malaysia, Philippines, Thailand and China that excludes securities not available to foreign investors. As of May 31, 2004, 0.81% of the assets in the Matthews Asian Growth and Income Fund were invested in India, 3.81% of the Funds’s assets were invested in Japan, 1.61% of the Fund’s assets were invested in Australia, and 2.57% of the Fund’s assets were invested in the United Kingdom, which are not included in the MSCI All Country Far East Free ex-Japan Index. Source: Bloomberg. 2 As of 5/31/04, the Lipper Pacific ex-Japan Funds Category Average consisted of 61 funds for the three-month period, 58 funds for the one-year period, 54 funds for the three-year period, 41 funds for the five-year period, and 15 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 Includes management fee, shareholder services fees and other expenses. Matthews Asian Funds do not charge 12b-1 fees. 4 The lesser of fiscal year-to-date purchase costs or sales proceeds divided by the average monthly market value of long-term securities.800.789.ASIA [2742] www.matthewsfunds.com 11
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SCHEDULE OF INVESTMENTS (Unaudited)
EQUITIES: 75.92%*
SHARES VALUE ============================================================================ CHINA/HONG KONG: 29.25% CLP Holdings, Ltd. 4,704,200 $24,927,631 Hongkong Electric Holdings, Ltd. 5,914,500 24,738,924 Hongkong Land Holdings, Ltd. 14,148,700 22,920,894 Hong Kong & China Gas Co., Ltd. 14,006,000 22,103,671 Television Broadcasts, Ltd. 3,806,000 16,749,740 Sun Hung Kai Properties, Ltd. 1,878,000 15,963,446 Shangri-La Asia, Ltd. 15,641,400 15,352,610 Giordano International, Ltd. 24,585,000 15,062,212 Hang Seng Bank, Ltd. 1,128,800 14,302,082 Cafe de Coral Holdings, Ltd. 15,091,100 13,941,149 PCCW, Ltd. ** 19,206,000 13,060,445 Wharf Holdings, Ltd. 4,553,000 12,851,846 MTR Corp., Ltd. 8,342,300 12,202,135 Citic Pacific, Ltd. 4,842,000 11,803,847 Cheung Kong Infrastructure Holdings, Ltd. 4,475,500 10,852,968 Hengan International Group Co., Ltd. 18,148,000 10,652,831 PetroChina Co., Ltd. ADR 202,250 9,606,875 Hang Lung Group, Ltd. 5,693,000 7,742,696 PetroChina Co., Ltd. H Shares 15,666,000 7,437,124 Vitasoy International Holdings, Ltd. 26,825,000 6,126,394 Lerado Group Co., Ltd. 6,396,000 1,124,279 China Hong Kong Photo Products Holdings, Ltd. 14,998,003 923,677 Total China/Hong Kong 290,447,476 ============================================================================ SHARES VALUE ============================================================================ SOUTH KOREA: 14.01% Korea Gas Corp. 658,590 $17,836,400 Shinhan Financial Group, Ltd. 1,051,230 17,009,902 Samsung Fire & Marine Insurance Co., Ltd. 236,940 15,193,286 Hyundai Motor Co., Ltd., Pfd. 721,890 14,128,582 KT Corp., ADR 631,800 11,024,910 Hyundai Motor Co., Ltd., 2nd Pfd. 510,230 10,905,813 Korean Reinsurance Co. 218,669 8,137,088 SK Telecom Co., Ltd. ADR 368,300 7,686,421 Sindo Ricoh Co. 121,490 5,933,972 Korea Electric Power Corp., ADR 620,950 5,557,502 LG Ad, Inc. 340,870 5,383,929 Korea Electric Power Corp. 238,500 3,859,157 LG Chem Ltd., Pfd. 200,380 3,818,564 Samsung Fire & Marine Insurance Co., Ltd., Pfd. 142,820 3,690,186 Daehan City Gas Co., Ltd. 280,300 3,296,373 Samchully Co., Ltd. 66,410 3,123,969 LG Household & Health Care, Ltd. Pfd. 177,830 2,549,261 Total South Korea 139,135,315 ============================================================================ SINGAPORE: 13.08% Singapore Post, Ltd. 56,996,000 27,312,503 Singapore Press Holdings, Ltd. 1,910,000 23,022,196 Fraser And Neave, Ltd. 2,881,820 22,874,949 Singapore Telecommunications, Ltd. 15,769,000 20,305,224 CapitalMall Trust REIT 15,149,000 14,518,812 Singapore Exchange, Ltd. 12,820,000 11,985,183 Parkway Holdings, Ltd. 6,749,000 4,563,487 DBS Group Holdings, Ltd. 409,335 3,393,573 Singapore Technologies Engineering, Ltd. 1,742,000 1,976,811 Total Singapore 129,952,738 ============================================================================12 MATTHEWS ASIAN FUNDS
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SHARES VALUE ============================================================================ THAILAND: 6.30% PTT Public Co., Ltd. 4,819,000 $18,292,482 Advanced Info Service Public Co., Ltd. 7,370,000 15,986,197 BEC World Public Co., Ltd. 27,563,900 11,210,361 Bangkok Bank Public Co., Ltd. ** 4,196,300 9,929,623 Charoen Pokphand Foods Public Co., Ltd. 52,037,000 4,463,612 Thai Reinsurance Public Co., Ltd. 25,672,800 2,695,739 Charoen Pokphand Foods Public Co., Ltd. Warrants ** 638,000 34,597 Total Thailand 62,612,611 ============================================================================ JAPAN: 3.81% Nippon Building Fund, Inc. REIT 1,887 13,607,229 Japan Retail Fund Investment Corp. REIT 1,980 13,310,473 Japan Real Estate Investment Corp. REIT 1,592 10,918,218 Total Japan 37,835,920 ============================================================================ UNITED KINGDOM: 2.57% HSBC Holdings PLC ADR 278,700 20,632,161 HSBC Holdings PLC 329,600 4,884,435 Total United Kingdom 25,516,596 ============================================================================ SHARES VALUE ============================================================================ INDONESIA: 2.34% PT Telekomunikasi Indonesia ADR 745,500 $12,039,825 PT Tempo Scan Pacific 12,357,000 9,259,423 PT Ramayana Lestari Sentosa 2,936,000 1,282,027 PT Telekomunikasi Indonesia 880,000 702,102 Total Indonesia 23,283,377 ============================================================================ TAIWAN: 2.14% Chunghwa Telecom Co., Ltd. ADR 1,252,200 20,223,030 Chunghwa Telecom Co., Ltd. 648,000 1,069,467 Total Taiwan 21,292,497 ============================================================================ AUSTRALIA: 1.61% AXA Asia Pacific Holdings, Ltd. 6,585,658 15,978,320 Total Australia 15,978,320 ============================================================================ INDIA: 0.81% Hero Honda Motors, Ltd. 812,300 8,092,577 Total India 8,092,577 ============================================================================ TOTAL EQUITIES (Cost $621,954,299) $754,147,427 ============================================================================See footnotes on page 15.
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SCHEDULE OF INVESTMENTS (Unaudited) (continued)
INTERNATIONAL DOLLAR BONDS: 23.30%*
FACE AMOUNT VALUE ============================================================================ CHINA/HONG KONG: 10.28% China Mobile Hong Kong, Ltd., Cnv. 2.250%, 11/03/05 $47,650,000 $47,361,717 PCCW Capital II, Ltd., Cnv. 1.000%, 01/29/07 26,050,000 28,744,612 Hang Lung Properties., Ltd., Cnv. 5.250%, 12/29/49 11,550,000 12,416,250 New World Capital Finance, Ltd., Cnv. 3.000%, 06/09/04 4,890,000 6,014,700 Tingyi (C.I.) Holding Corp., Cnv. 3.500%, 06/04/05 3,500,000 3,988,542 PCCW Capital, Ltd., Cnv. 3.500%, 12/05/05 3,000,000 3,585,000 Total China/Hong Kong 102,110,821 ============================================================================ FACE AMOUNT VALUE ============================================================================ TAIWAN: 7.52% Cathay Financial Holding Co., Cnv. 0.000%, 05/20/07 $30,600,000 $36,612,900 Fubon Financial Holding Co., Ltd., Cnv. 0.000%, 07/10/04 26,000,000 28,075,060 Sinopac Holdings Co., Cnv. 0.000%, 07/12/07 8,000,000 9,996,667 Total Taiwan 74,684,627 ============================================================================ SOUTH KOREA: 5.50% Korea Telecom Corp., Cnv. 0.250%, 01/04/07 35,825,000 35,896,292 Korea Deposit Insurance Corp., Cnv. 2.250%, 10/11/05 14,820,000 18,395,325 Korea Telecom Corp., Cnv.*** 0.250%, 01/04/07 375,000 375,746 Total South Korea 54,667,363 ============================================================================ TOTAL INTERNATIONAL DOLLAR BONDS $231,462,811 (Cost $227,269,620) ============================================================================14 MATTHEWS ASIAN FUNDS
M A Y 3 1 , 2 0 0 4
VALUE ============================================================================ TOTAL INVESTMENTS: 99.22%* $985,610,238 (Cost $849,223,919****) CASH AND OTHER ASSETS, LESS LIABILITIES: 0.78% 7,742,605 ------------ NET ASSETS: 100.00% $993,352,843 ============================================================================* As a percentage of net assets as of May 31, 2004 ** Non-income producing security *** Security exempt from registration under rule 144A of the Securities Act of 1933. This security may be resold in transactions exempt from registration, normally to qualified, institutional buyers. At May 31, 2004, the value of this security amounted to $375,746 or 0.04% of net assets.
**** Cost of investments is $849,223,919 and net unrealized appreciation consists of:Gross unrealized appreciation..............$147,896,206 Gross unrealized depreciation.............. (11,509,887) ------------ Net unrealized appreciation................$136,386,319 ============ADR American Depositary Receipt Pfd. Preferred Cnv. Convertible REIT Real Estate Investment Trust800.789.ASIA [2742] www.matthewsfunds.com 15
M A T T H E W S K O R E A F U N D
CO-PORTFOLIO MANAGERS SYMBOL: MAKOX
G. Paul Matthews and Mark W. Headley
The Matthews Korea Fund invests at least 80% of its assets in the common and preferred stocks of companies located in South Korea.
PORTFOLIO MANAGER COMMENTARY
For the three-month period ended May 31, 2004, the Matthews Korea Fund was down 4.87%, outperforming its benchmark KOSPI Index, which was down 7.75% over the same period.
The Fund benefited from its underweight position in the information technology (IT) sector compared to the KOSPI Index, which is heavily dominated by that sector. During the quarter, the IT sector underperformed the KOSPI Index due to concerns over inventory build-up and consequent price declines in some IT products. Poor sales in handsets and LCD televisions weakened major Korean consumer electronics companies’ performance. Within the IT sector, however, the Fund did benefit from Internet-related stocks such as online gaming and search-based portals. Consumer staple stocks, which investors view as defensive, also contributed to the Fund’s performance over the quarter.
The Korean equity market was volatile during the quarter. China-related stocks corrected sharply due to concerns over that country’s tightening policies. Recently, China has become Korea’s largest export destination and the largest source of its trade surplus.
Korea’s reliance on oil imports became a burden during the quarter, as high oil prices dampened investor sentiment. The Korean political scene was also very dramatic during the three-month period: The Korean General Assembly voted virtually unanimously to impeach President Roh. However, a few weeks after the general election, the Constitutional Court reinstated him as Korea’s president.
The Fund continues to underweight the IT sector while maintaining its overweight positions in the consumer and financial sectors.
16 MATTHEWS ASIAN FUNDS
M A Y 3 1, 2 0 0 4
FUND HIGHLIGHTS Fund Inception: 1/3/95--------------------------------------------------------------------------------------------------------- AVERAGE ANNUAL RETURNS AS OF MAY 31, 2004* --------------------------------------------------------------------------------------------------------- SINCE 3 MTHS 1 YR 3 YRS 5 YRS INCEPTION --------------------------------------------------------------------------------------------------------- Matthews Korea Fund -4.87% 30.19% 24.22% 11.09% 0.18% KOSPI Index(1) -7.75% 32.51% 14.19% 2.88% -6.07% Lipper Pacific ex-Japan Funds Category Average(2) -9.23% 38.54% 9.90% 4.98% 0.59%+ --------------------------------------------------------------------------------------------------------- +From 12/31/94 --------------------------------------------------------------------------------------------------------- MATTHEWS KOREA FUND AVERAGE ANNUAL RETURNS AS OF*: --------------------------------------------------------------------------------------------------------- SINCE 1 YR 3 YRS 5 YRS INCEPTION --------------------------------------------------------------------------------------------------------- March 31, 2004 81.40% 37.16% 19.53% 1.01% June 30, 2004 24.10% 24.87% 6.01% 0.23% --------------------------------------------------------------------------------------------------------- *Assumes reinvestment of all dividends. Past performance is not indicative of future results. Unusually high returns may not be sustainable. ------------------------------------------------------- OPERATING EXPENSES(3) ------------------------------------------------------- For nine months ended 5/31/04, annualized** 1.50% For Fiscal Year 2003 (ended 8/31/03)*** 1.72% ------------------------------------------------------- **Unaudited ***Audited ------------------------------------------------------- PORTFOLIO TURNOVER(4) ------------------------------------------------------- For nine months ended 5/31/04, annualized** 16.64% For Fiscal Year 2003 (ended 8/31/03)*** 29.90% ------------------------------------------------------- ------------------------------------- COUNTRY ALLOCATION++ ------------------------------------- South Korea 99% Cash 1% ------------------------------------- ------------------------------------- SECTOR ALLOCATION++ ------------------------------------- Information Technology 25% Financials 22% Consumer Discretionary 17% Consumer Staples 11% Telecommunication Services 10% Health Care 6% Industrials 5% Utilities 2% Materials 1% Cash 1% ------------------------------------- ------------------------------------- MARKET CAP EXPOSURE++ ------------------------------------- Large cap (over $5 billion) 32% Mid cap ($1-$5 billion) 34% Small cap (under $1 billion) 33% Cash 1% ------------------------------------- ++ Percentage figures are rounded. -------------------------------------------------------------------------- NAV ASSETS REDEMPTION FEE 12b-1 FEES -------------------------------------------------------------------------- $4.30 $229.9 million 2.00% within 90 days NoneAll data is as of May 31, 2004, unless otherwise noted.
1 The South Korea Stock Price Index (KOSPI) is a capitalization-weighted index of all common stocks and preferred shares listed on the Korea Stock Exchange. Source: Bloomberg. 2 As of 5/31/04, the Lipper Pacific ex-Japan Funds Category Average consisted of 61 funds for the three-month period, 58 funds for the one-year period, 54 funds for the three-year period, 41 funds for the five-year period, and 20 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 Includes management fee, shareholder services fees and other expenses. Matthews Asian Funds do not charge 12b-1 fees. 4 The lesser of fiscal year-to-date purchase costs or sales proceeds divided by the average monthly market value of long-term securities.800.789.ASIA [2742] www.matthewsfunds.com 17
M A T T H E W S K O R E A F U N D
SCHEDULE OF INVESTMENTS (Unaudited)
EQUITIES: 98.76%*SHARES VALUE ============================================================================ INFORMATION TECHNOLOGY: 25.24% Semiconductors & Semiconductor Equipment: 12.92% Samsung Electronics Co., Ltd. 54,341 $24,256,251 Samsung Electronics Co., Ltd., Pfd. 19,930 5,448,908 29,705,159 Electronic Equipment & Instruments: 5.61% Kumho Electric Inc. 107,610 4,840,349 Power Logics Co., Ltd. ** 230,075 3,258,713 Daeduck GDS Co., Ltd. 324,550 2,783,171 Amotech Co., Ltd. 111,259 2,024,714 12,906,947 Internet Software & Services: 3.44% NHN Corp. 85,392 7,916,508 Software: 3.27% NCsoft Corp. ** 91,086 7,506,121 ---------- Total Information Technology 58,034,735 ============================================================================ FINANCIALS: 21.68% Commercial Banks: 15.66% Hana Bank 662,764 14,735,042 Kookmin Bank 318,822 11,083,987 Shinhan Financial Group Co., Ltd. 468,562 7,581,779 Kookmin Bank ADR 75,139 2,589,290 35,990,098 Insurance: 4.15% Samsung Fire & Marine Insurance Co., Ltd. 109,303 7,008,828 Samsung Fire & Marine Insurance Co., Ltd., Pfd. 98,000 2,532,126 9,540,954 Capital Markets: 1.87% Samsung Securities Co., Ltd. 241,885 4,308,437 ---------- Total Financials 49,839,489 ============================================================================ CONSUMER DISCRETIONARY: 17.24% Automobiles: 5.19% Hyundai Motor Co., Ltd. 176,361 6,767,103 Hyundai Motor Co., Ltd., Pfd. 263,720 5,161,437 11,928,540 SHARES VALUE ============================================================================ Media: 4.16% Cheil Communications, Inc. 34,090 $4,491,879 CJ Entertainment, Inc. 353,357 4,094,871 LG Ad, Inc. 60,360 953,366 9,540,116 Internet & Catalog Retail: 3.71% Internet Auction Co., Ltd. ** 84,197 6,584,271 LG Home Shopping, Inc. 63,079 1,949,306 8,533,577 Multiline Retail: 2.47% Hyundai Department Store Co., Ltd. 176,530 4,167,196 Taegu Department Store Co., Ltd. 269,300 1,521,090 5,688,286 Auto Components: 0.99% Korea Electric Terminal Co., Ltd. 137,720 2,269,818 Textiles, Apparel & Luxury Goods: 0.72% Handsome Co., Ltd. 211,379 1,662,073 --------- Total Consumer Discretionary 39,622,410 ============================================================================ CONSUMER STAPLES: 11.00% Food Products: 5.28% Nong Shim Co., Ltd. 37,080 6,970,703 Pulmuone Co., Ltd. 72,490 2,980,618 ORION Corp. 36,470 2,185,163 12,136,484 Personal Products: 3.22% Amorepacific Corp. 43,000 7,400,747 Beverages: 2.50% Hite Brewery Co., Ltd. 88,951 5,757,247 ---------- Total Consumer Staples 25,294,478 ============================================================================ TELECOMMUNICATION SERVICES: 9.60% Wireless Telecommunication Services: 6.35% SK Telecom Co., Ltd. 52,945 8,998,764 SK Telecom Co., Ltd. ADR 184,300 3,846,341 KT Freetel 106,751 1,759,405 14,604,51018 MATTHEWS ASIAN FUNDS
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SHARES VALUE ============================================================================ Diversified Telecommunication Services: 3.25% KT Corp. ADR 311,500 $5,435,675 KT Corp. 59,720 2,027,491 7,463,166 ---------- Total Telecommunication Services 22,067,676 ============================================================================ HEALTH CARE: 6.44% Pharmaceuticals: 6.44% Hanmi Pharm Co., Ltd. 175,250 5,069,681 Yuhan Corp. 82,205 4,727,872 LG Life Sciences, Ltd. ** 116,610 2,782,744 Daewoong Pharmaceutical Co., Ltd. ** 138,000 2,227,048 ---------- Total Health Care 14,807,345 ============================================================================ INDUSTRIALS: 5.39% Commercial Services & Supplies: 3.55% S1 Corp. 239,115 5,172,495 Sindo Ricoh Co., Ltd. 61,226 2,990,480 8,162,975 Construction & Engineering: 1.84% Tae Young Corp. 139,630 4,231,031 ---------- Total Industrials 12,394,006 ============================================================================ UTILITIES: 1.41% Electric Utilities: 0.97% Korea Electric Power (KEPCO) Corp. 138,610 2,242,842 Gas Utilities: 0.44% Samchully Co., Ltd. 21,380 1,005,729 ---------- Total Utilities 3,248,571 ============================================================================ MATERIALS: 0.76% Chemicals: 0.76% LG Chem, Ltd. 49,410 1,738,968 ---------- Total Materials 1,738,968 ============================================================================ TOTAL EQUITIES: SOUTH KOREA $227,047,678 (Cost $170,994,476) ============================================================================ INTERNATIONAL DOLLAR BONDS: SOUTH KOREA: 0.68%* FACE AMOUNT VALUE ============================================================================ TELECOMMUNICATION SERVICES: 0.57% Diversified Telecommunication Services: 0.57% Korea Telecom Corp., Cnv. 0.250%, 01/04/07 $925,000 $926,841 Korea Telecom Corp., Cnv. *** 0.250%, 01/04/07 375,000 375,746 ---------- Total Telecommunication Services 1,302,587 ============================================================================ UTILITIES: 0.11% Electric Utilities: 0.11% Korea Deposit Insurance Corp., Cnv. 2.250%, 10/11/05 200,000 248,250 ---------- Total Utilities 248,250 ============================================================================ TOTAL INTERNATIONAL DOLLAR BONDS: SOUTH KOREA 1,550,837 (Cost $1,606,098) ============================================================================ TOTAL INVESTMENTS: 99.44% 228,598,515 (Cost $172,600,574****) CASH AND OTHER ASSETS, LESS LIABILITIES: 0.56% 1,293,817 ---------- NET ASSETS: 100.00% $229,892,332 ============================================================================* As a percentage of net assets as of May 31, 2004
** Non-income producing security
*** Security exempt from registration under rule 144A of the Securities Act of 1933. This security may be resold in transactions exempt from registration, normally to qualified, institutional buyers. At May 31, 2004, the value of this security amounted to $375,746 or 0.16% of net assets.
*** Cost of investments is $172,600,574 and net unrealized appreciation consists of:Gross unrealized appreciation.............$71,448,553 Gross unrealized depreciation.............(15,450,612) ----------- Net unrealized appreciation...............$55,997,941 ===========ADR American Depositary Receipt
Cnv. Convertible
GDS Global Depositary Shares
Pfd. Preferred800.789.ASIA [2742] www.matthewsfunds.com 19
M A T T H E W S C H I N A F U N D
CO-PORTFOLIO MANAGERS SYMBOL: MCHFXG. Paul Matthews, Mark W. Headley and Richard H. Gao
The Matthews China Fund invests at least 80% of its assets in the common and preferred stocks of companies located in China. China includes Taiwan and Hong Kong.
PORTFOLIO MANAGER COMMENTARY
After months of consistent gains, China-related shares had a major correction during the three months ended May 31, 2004. The Matthews China Fund was down 11.65%, outperforming its benchmark MSCI China Free Index, which was down 14.92% over the same period. China’s economic tightening measures, high commodity prices and market expectations of higher interest rates were the major reasons behind the stock price correction.
During the quarter, the Fund had selling pressures from all sectors, with most coming from the consumer discretionary, industrials and telecom services sectors. Stocks in these sectors had accumulated substantial gains since the second half of last year, and they had become investors’ top selling candidates when investment sentiment turned bearish. The Fund’s selected investments in the technology and utilities sectors provided some positive returns. Its underweighting in commodity stocks also helped it to outperform its benchmark index.
The Chinese economy showed signs of overheating beginning late last year. To slow down the economy, the central bank adopted some tightening measures and imposed a series of lending and investment curbs on projects in the overheated industries, with a goal of achieving a soft landing. At the current stage, it is still too early to judge if China can achieve a soft landing. However, there are early signs that the tightening measures are taking effect.
The Matthews China Fund continues to be well-diversified and is fully invested. As was the case three months ago, consumer discretionary, industrials and financials remain the top three sectors in the portfolio. We believe that these sectors will benefit most from the continued growth of China’s domestic economy. Over the period, we increased our weighting in the information technology sector, and two new stocks were added to the portfolio to increase our exposure to the consumer and technology sectors.20 MATTHEWS ASIAN FUNDS
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FUND HIGHLIGHTS Fund Inception: 2/19/98--------------------------------------------------------------------------------------------------------- AVERAGE ANNUAL RETURNS AS OF MAY 31, 2004* --------------------------------------------------------------------------------------------------------- SINCE 3 MTHS 1 YR 3 YRS 5 YRS INCEPTION --------------------------------------------------------------------------------------------------------- Matthews China Fund -11.65% 45.91% 7.68% 18.06% 7.17% MSCI China Free Index(1) -14.92% 51.82% 3.38% -4.83% -10.75% Lipper China Region Funds Category Average(2) -11.87% 42.90% 6.15% 9.93% 4.40%+ --------------------------------------------------------------------------------------------------------- +From 2/28/98 --------------------------------------------------------------------------------------------------------- MATTHEWS CHINA FUND AVERAGE ANNUAL RETURNS AS OF*: --------------------------------------------------------------------------------------------------------- SINCE 1 YR 3 YRS 5 YRS INCEPTION --------------------------------------------------------------------------------------------------------- March 31, 2004 67.96% 17.42% 23.72% 8.46% June 30, 2004 37.94% 6.99% 9.46% 6.69% --------------------------------------------------------------------------------------------------------- *Assumes reinvestment of all dividends. Past performance is not indicative of future results. Unusually high returns may not be sustainable. ------------------------------------------------------- OPERATING EXPENSES(3) ------------------------------------------------------- For nine months ended 5/31/04, annualized** 1.50% For Fiscal Year 2003 (ended 8/31/03)*** 1.79% ------------------------------------------------------- **Unaudited ***Audited ------------------------------------------------------- PORTFOLIO TURNOVER(4) ------------------------------------------------------- For nine months ended 5/31/04, annualized** 32.61% For Fiscal Year 2003 (ended 8/31/03)*** 19.34% ------------------------------------------------------- ------------------------------------- CHINA EXPOSURE++(5) ------------------------------------- China Play 39% H Share 29% Red Chip 23% B Share 7% Cash 2% ------------------------------------- ------------------------------------- SECTOR ALLOCATION++ ------------------------------------- Consumer Discretionary 23% Industrials 14% Financials 13% Information Technology 13% Utilities 12% Telecommunications Services 7% Energy 7% Health Care 5% Materials 4% Consumer Staples 2% Cash 2% ------------------------------------- ------------------------------------- MARKET CAP EXPOSURE++ ------------------------------------- Large cap (over $5 billion) 28% Mid cap ($1-$5 billion) 48% Small cap (under $1 billion) 22% Cash 2% ------------------------------------- ++Percentage figures are rounded. -------------------------------------------------------------------------- NAV ASSETS REDEMPTION FEE 12b-1 FEES -------------------------------------------------------------------------- $13.72 $363.3 million 2.00% within 90 days NoneAll data is as of May 31, 2004, unless otherwise noted.
1 The MSCI China Free Index is an unmanaged capitalization-weighted index of Chinese equities that includes Red Chips and H shares listed on the Hong Kong exchange, and B shares listed on the Shanghai and Shenzhen exchanges. Source: Bloomberg. 2 As of 5/31/04, the Lipper China Region Funds Category Average consisted of 22 funds for the three-month, one-year and three-year periods; 20 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. 3 Includes management fee, shareholder services fees and other expenses. Matthews Asian Funds do not charge 12b-1 fees. 4 The lesser of fiscal year-to-date purchase costs or sales proceeds divided by the average monthly market value of long-term securities. 5 H shares are Mainland Chinese companies listed on the Hong Kong stock exchange; companies are incorporated in mainland China and approved by the China Securities Regulatory Commission for a listing in Hong Kong. Red Chips are Mainland Chinese companies listed on the Hong Kong stock exchange; companies are incorporated in Hong Kong. B Shares are Mainland Chinese stocks listed on the Shanghai and Shenzhen stock exchanges, available to Chinese and foreign investors.800.789.ASIA [2742] www.matthewsfunds.com 21
M A T T H E W S C H I N A F U N D
SCHEDULE OF INVESTMENTS (Unaudited)
EQUITIES: CHINA/HONG KONG: 98.27%*
SHARES VALUE ============================================================================ CONSUMER DISCRETIONARY: 22.97% Media: 4.60% Television Broadcasts, Ltd. 2,542,000 $11,187,031 Clear Media, Ltd. ** 6,234,000 5,519,008 16,706,039 Hotels, Restaurants & Leisure: 4.20% Shangri-La Asia, Ltd. 8,995,600 8,829,513 Cafe de Coral Holdings, Ltd. 4,152,100 3,835,707 China Travel International Investment Hong Kong, Ltd. 14,712,000 2,586,053 China Travel International Investment Hong Kong, Ltd. Warrants ** 2,942,400 0 15,251,273 Automobiles: 3.65% Denway Motors, Ltd. 25,805,200 12,084,961 Great Wall Automobile Holdings Co., Ltd. H Shares ** 959,000 1,181,231 13,266,192 Household Durables: 3.51% TCL International Holdings, Ltd. 24,764,000 8,499,429 Lerado Group Holding Co., Ltd. 24,089,000 4,234,328 12,733,757 Textiles, Apparel & Luxury Goods: 2.73% Weiqiao Textile Co., Ltd. H Shares ** 3,870,000 6,157,123 Texwinca Holdings, Ltd. 4,742,000 3,772,232 9,929,355 Distributors: 2.56% Li & Fung, Ltd. 6,284,000 9,312,437 Specialty Retail: 1.72% Giordano International, Ltd. 10,188,000 6,241,766 ----------- Total Consumer Discretionary 83,440,819 ============================================================================ INDUSTRIALS: 13.89% Transportation Infrastructure: 6.11% Cosco Pacific Ltd. 5,604,000 7,765,458 Zhejiang Expressway Co., Ltd. H Shares 10,420,000 7,219,492 Beijing Capital International Airport Co., Ltd. H Shares 11,944,000 3,716,265 GZI Transport, Ltd. 12,384,000 3,495,657 22,196,872 SHARES VALUE ============================================================================ Industrial Conglomerates: 3.31% China Merchants Holdings International Co., Ltd. 5,567,000 $7,357,048 Shanghai Industrial Holdings, Ltd. 2,523,000 4,677,677 12,034,725 Machinery: 2.11% Shanghai Zhenhua Port Machinery Co., Ltd. B Shares 8,729,682 7,655,931 Airlines: 1.32% China Southern Airlines Co., Ltd. H Shares ** 11,458,000 4,777,903 Air Freight & Logistics: 1.04% Sinotrans, Ltd. H Shares 10,566,000 3,795,892 ----------- Total Industrials 50,461,323 ============================================================================ FINANCIALS: 13.21% Real Estate: 7.03% Swire Pacific, Ltd. A Shares 2,209,000 14,242,196 China Vanke Co., Ltd. B Shares 21,386,658 11,305,384 25,547,580 Commercial Banks: 3.40% BOC Hong Kong Holdings, Ltd. 7,131,500 12,352,641 Insurance: 2.78% PICC Property and Casualty Co., Ltd. H Shares ** 15,780,000 6,225,830 China Insurance International Holdings Co., Ltd. 8,104,000 3,847,214 10,073,044 ---------- Total Financials 47,973,265 ============================================================================ INFORMATION TECHNOLOGY: 12.52% Computers & Peripherals: 4.26% TPV Technology, Ltd. 12,318,000 8,692,567 Lenovo Group, Ltd. 21,606,000 6,791,812 15,484,379 Electronic Equipment & Instruments: 3.51% BYD Co., Ltd. H Shares 3,642,500 12,735,360 Communications Equipment: 1.68% Comba Telecom Systems Holdings, Ltd.** 12,006,000 6,123,231 IT Services: 1.31% Travelsky Technology, Ltd. H Shares 7,110,000 4,743,710 Internet Software & Services: 1.29% Sina Corp. ** 129,600 4,696,704* As a percentage of net assets as of May 31, 200422 MATTHEWS ASIAN FUNDS
SHARES VALUE ============================================================================ Semiconductors & Semiconductor Equipment: 0.47% Semiconductor Manufacturing International, Corp. ADR ** 138,000 $1,711,200 ----------- Total Information Technology 45,494,584 ============================================================================ UTILITIES: 11.58% Electric Utilities: 8.26% Datang International Power Generation, Co., Ltd. H Shares 13,496,000 11,255,469 Huaneng Power International, Inc. H Shares 10,234,000 9,519,817 Guangdong Electric Power Development Co., Ltd. B Shares 8,471,726 6,293,549 Huaneng Power International, Inc. ADR 78,800 2,931,360 30,000,195 Gas Utilities: 3.32% Hong Kong and China Gas Co., Ltd. 7,653,400 12,078,269 ----------- Total Utilities 42,078,464 ============================================================================ TELECOMMUNICATION SERVICES: 6.79% Wireless Telecommunication Services: 5.25% China Mobile HK, Ltd. 5,199,583 14,877,110 China Unicom, Ltd. 4,366,000 3,361,090 China Mobile HK, Ltd. ADR 50,500 724,676 China Unicom, Ltd. ADR 16,200 122,958 19,085,834 Diversified Telecommunication Services: 1.54% China Telecom Corp., Ltd. H Shares 17,724,000 5,571,512 ----------- Total Telecommunication Services 24,657,346 ============================================================================ ENERGY: 6.65% Oil & Gas: 5.34% Sinopec Zhenhai Refining & Chemical Co., Ltd. 8,670,000 7,341,896 CNOOC, Ltd. 15,812,000 6,745,647 PetroChina Co., Ltd. H Shares 11,226,000 5,329,322 19,416,865 Energy Equipment & Services: 1.31% China Oilfield Services, Ltd. H Shares 18,018,000 4,739,206 ----------- Total Energy 24,156,071 ============================================================================ SHARES VALUE ============================================================================ HEALTH CARE: 4.52% Biotechnology: 1.77% Global Bio-chem Technology Group Co., Ltd. 8,712,000 $6,427,334 Global Bio-chem Technology Group Co., Ltd. Warrants ** 1,089,000 0 6,427,334 Pharmaceuticals: 1.50% China Pharmaceutical Group, Ltd. 18,084,000 5,452,649 Health Care Equipment & Supplies: 1.25% Moulin International Holdings, Ltd. 7,192,000 4,544,657 ----------- Total Health Care 16,424,640 ============================================================================ MATERIALS: 4.02% Construction Materials: 4.02% Cheung Kong Infrastructure Holdings, Ltd. 6,018,500 14,594,702 Total Materials 14,594,702 ============================================================================ CONSUMER STAPLES: 2.12% Beverages: 1.25% Tsingtao Brewery Co., Ltd. H Shares 4,711,000 4,563,575 Food & Staples Retailing: 0.87% Lianhua Supermarket Holdings, Ltd. H Shares 3,102,000 3,144,228 ----------- Total Consumer Staples 7,707,803 ============================================================================ TOTAL INVESTMENTS: 98.27% 356,989,017 (Cost $348,336,628***) CASH AND OTHER ASSETS, LESS LIABILITIES: 1.73% 6,288,888 ----------- NET ASSETS: 100.00% $363,277,905 ============================================================================M A Y 3 1 , 2 0 0 4
** Non-income producing security
*** Cost of investments is $348,336,628 and net unrealized appreciation consists of:Gross unrealized appreciation.........$28,300,871 Gross unrealized depreciation.........(19,648,482) ----------- Net unrealized appreciation........... $8,652,389 ===========ADR American Depositary Receipt800.789.ASIA [2742] www.matthewsfunds.com 23
PORTFOLIO MANAGER SYMBOL: MJFOXM A T T H E W S J A P A N F U N D
Mark W. Headley
The Matthews Japan Fund invests at least 80% of its assets in the common and preferred stocks of companies located in Japan.
PORTFOLIO MANAGER COMMENTARY
For the three months ended May 31, 2004, the Matthews Japan Fund gained 10.51% and outperformed both the MSCI Developed Japan Market and TOPIX indices, which gained 3.55% and 5.52%, respectively.
The Fund benefited most from positions in its three main sectors: financial, information technology and consumer discretionary. Proxies on the Japanese economy—banks and brokerages, in particular—rose and led the Fund’s gains for the quarter. Select stocks in the consumer discretionary and technology sectors also contributed significantly to the Fund’s performance. Positions in the telecommunications sector underperformed due to concerns over pricing pressures and detracted from the Fund’s performance.
The Japanese equity market was volatile during the quarter. The market corrected sharply in early May due to geopolitical issues, concerns over higher interest rates in the United States, and a slowdown in China. Toward the end of the quarter, however, the Japanese market rebounded as these concerns were somewhat alleviated.
During the quarter, the Fund selectively added positions in the consumer discretionary and consumer staple sectors. Japan’s higher-than-expected GDP figures, stabilizing employment, revitalized corporates and increasing consumer confidence indicate that conditions are indeed improving in Japan. The Fund’s largest exposure remains the consumer discretionary sector, with a bias toward domestic-oriented stocks, which could benefit from this domestic-led recovery in Japan.
24 MATTHEWS ASIAN FUNDS
M A Y 3 1 , 2 0 0 4
FUND HIGHLIGHTS Fund Inception: 12/31/98---------------------------------------------------------------------------------------------------------- AVERAGE ANNUAL RETURNS AS OF MAY 31, 2004* ---------------------------------------------------------------------------------------------------------- SINCE 3 MTHS 1 YR 3 YRS 5 YRS INCEPTION ---------------------------------------------------------------------------------------------------------- Matthews Japan Fund 10.51% 77.35% 2.74% 1.98% 10.25% MSCI Developed Markets Japan Index(1) 3.55% 49.11% -2.33% -0.85% 1.06% TOPIX Index(2) 5.52% 49.77% -0.99% 0.38% 2.66% Lipper Japanese Funds Category Average(3) 5.47% 49.85% -3.30% 0.09% 2.95% ---------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------- MATTHEWS JAPAN FUND AVERAGE ANNUAL RETURNS AS OF*: ---------------------------------------------------------------------------------------------------------- SINCE 1 YR 3 YRS 5 YRS INCEPTION ---------------------------------------------------------------------------------------------------------- March 31, 2004 103.26% 8.00% 5.05% 11.81% June 30, 2004 75.31% 7.58% -0.89% 11.46% ---------------------------------------------------------------------------------------------------------- *Assumes reinvestment of all dividends. Past performance is not indicative of future results. Unusually high returns may not be sustainable. ------------------------------------------------------ OPERATING EXPENSES(4) ------------------------------------------------------ For nine months ended 5/31/04, annualized** 1.47% For Fiscal Year 2003 (ended 8/31/03)*** 2.00% ------------------------------------------------------ **Unaudited ***Audited ------------------------------------------------------ PORTFOLIO TURNOVER(5) ------------------------------------------------------ For nine months ended 5/31/04, annualized** 21.22% For Fiscal Year 2003 (ended 8/31/03)*** 77.30% ------------------------------------------------------ ----------------------------------------- COUNTRY ALLOCATION++ ----------------------------------------- Japan 98% Cash 2% ----------------------------------------- ----------------------------------------- SECTOR ALLOCATION++ ----------------------------------------- Consumer Discretionary 33% Financials 22% Information Technology 16% Consumer Staples 10% Industrials 9% Telecommunications Services 8% Health Care 2% Cash 2% ----------------------------------------- ----------------------------------------- MARKET CAP EXPOSURE++ ----------------------------------------- Large cap (over $5 billion) 49% Mid cap ($1-$5 billion) 38% Small cap (under $1 billion) 11% Cash 2% ----------------------------------------- ++Percentage figures are rounded. ---------------------------------------------------------------------------------- NAV ASSETS REDEMPTION FEE 12b-1 FEES ---------------------------------------------------------------------------------- $14.72 $152.9 million 2.00% within 90 days None ----------------------------------------------------------------------------------All data is as of May 31, 2004, unless otherwise noted.
1 The MSCI Developed Markets Japan Index is an unmanaged capitalization-weighted index of Japanese equities listed in Japan. Source: Bloomberg. 2 The Tokyo Price Index (TOPIX) is a capitalization-weighted index of all companies listed on the First Section of the Tokyo Stock Exchange. Source: Bloomberg. 3 As of 5/31/04, the Lipper Japanese Funds Category Average consisted of 50 funds for the three-month period, 47 funds for the one-year period, 41 funds for the three-year period, 31 funds for the five-year period, and 31 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 Includes management fee, shareholder services fees and other expenses. Matthews Asian Funds do not charge 12b-1 fees. 5 The lesser of fiscal year-to-date purchase costs or sales proceeds divided by the average monthly market value of long-term securities.800.789.ASIA [2742] www.matthewsfunds.com 25
M A T T H E W S J A P A N F U N D
SCHEDULE OF INVESTMENTS (Unaudited)
EQUITIES: JAPAN: 98.27%*
SHARES VALUE ============================================================================ CONSUMER DISCRETIONARY: 32.59% Household Durables: 8.13% Matsushita Electric Industrial Co., Ltd 343,000 $4,735,743 Makita Corp. 281,000 3,940,737 Sharp Corp. 222,000 3,758,082 12,434,562 Leisure, Equipment & Products: 6.57% Shimano, Inc. 187,200 4,412,178 Yahama Corp. 275,400 4,171,179 Fuji Photo Film Co., Ltd. 50,000 1,461,208 10,044,565 Specialty Retail: 5.37% Gulliver International Co., Ltd. 32,060 3,390,920 Nitori Co., Ltd. 42,650 2,639,457 Paris Miki, Inc. 66,800 1,447,510 Kyoto Kimono Yuzen Co., Ltd. 331 739,715 8,217,602 Media: 3.35% Fuji Television Network, Inc. 2,247 5,123,221 Automobiles: 3.30% Honda Motor Co., Ltd. ADR 233,800 5,050,080 Hotels Restaurants & Leisure: 2.95% Nissin Healthcare Food Service Co., Ltd. 260,800 4,506,926 Multiline Retail: 2.90% Mitsukoshi, Ltd. 908,000 4,428,066 Internet & Catalog Retail: 0.02% Belluna Co., Ltd. 710 26,209 ---------- Total Consumer Discretionary 49,831,231 ============================================================================ FINANCIALS: 21.61% Commercial Banks: 9.35% The Sumitomo Trust and Banking Co., Ltd. 1,109,000 6,833,106 Mizuho Financial Group, Inc. 924 3,979,407 The Joyo Bank, Ltd. 883,000 3,483,266 14,295,779 SHARES VALUE ============================================================================ Capital Markets: 5.46% Nomura Holdings, Inc. 320,000 $4,904,592 Monex, Inc. ** 4,230 3,452,124 8,356,716 Real Estate: 3.44% Japan Retail Fund Investment Corp. REIT 416 2,796,544 Japan Real Estate Investment Corp. REIT 359 2,462,086 5,258,630 Insurance: 3.36% T&D Holdings, Inc. 122,445 5,129,340 ---------- Total Financials 33,040,465 ============================================================================ INFORMATION TECHNOLOGY: 15.51% Software: 4.47% Nintendo Co., Ltd. 47,215 4,733,248 Square Enix Co., Ltd. 82,300 2,111,020 6,844,268 IT Services: 3.01% Niws Co., Ltd. 1,577 4,608,650 Electronic Equipment & Instruments: 2.97% Murata Manufacturing Co., Ltd. 55,300 3,187,161 Macnica, Inc. 48,200 1,347,550 4,534,711 Office Electronics: 2.85% Canon, Inc. ADR 87,800 4,351,368 Internet Software & Services: 2.21% Access Co., Ltd. ** 100 2,705,270 Access Co., Ltd. W/I ** 25 676,318 3,381,588 ---------- Total Information Technology 23,720,585 ============================================================================26 MATTHEWS ASIAN FUNDS
M A Y 3 1 , 2 0 0 4
SHARES VALUE ============================================================================ CONSUMER STAPLES: 9.55% Food Staples & Retailing: 2.93% Seven-Eleven Japan Co., Ltd. 142,000 $4,483,872 Food Products: 2.56% Hokuto Corp. 254,280 3,913,416 Beverages: 2.54% Ito En, Ltd. 90,200 3,876,499 Personal Products: 1.52% Shiseido Co., Ltd. 197,000 2,331,382 ---------- Total Consumer Staples 14,605,169 ============================================================================ INDUSTRIALS: 9.42% Commercial Services & Supplies: 6.64% Secom Co., Ltd. 127,500 5,133,454 Toppan Forms Co., Ltd. 305,500 4,085,311 Heian Ceremony Service Co., Ltd. 116,000 934,087 10,152,852 Machinery: 2.78% Disco Corp. 49,900 2,243,863 Yushin Precision Equipment Co., Ltd. 99,145 2,004,877 4,248,740 ---------- Total Industrials 14,401,592 ============================================================================ SHARES VALUE ============================================================================ TELECOMMUNICATION SERVICES: 7.64% Diversified Telecommunication Services: 4.33% Nippon Telegraph & Telephone Corp. ADR 179,225 $4,469,872 Usen Corp. ** 10,440 2,153,648 6,623,520 Wireless Telecommunication Services: 3.31% NTT DoCoMo, Inc. 2,685 5,052,974 ---------- Total Telecommunication Services 11,676,494 ============================================================================ HEALTH CARE: 1.95% Health Care Equipment & Supplies: 1.95% Nakanishi, Inc. 47,000 2,993,713 Total Health Care 2,993,713 ============================================================================ TOTAL INVESTMENTS: 98.27% 150,269,249 (Cost $141,233,315***) CASH AND OTHER ASSETS, LESS LIABILITIES: 1.73% 2,648,424 ------------ NET ASSETS: 100.00% $152,917,673 ============================================================================* As a percentage of net assets as of May 31, 2004
** Non-income producing security
*** Cost of investments is $141,233,315 and net unrealized appreciation consists of:Gross unrealized appreciation.........$16,090,434 Gross unrealized depreciation......... (7,054,500) ----------- Net unrealized appreciation........... $9,035,934 ===========ADR American Depositary Receipt
REIT Real Estate Investment Trust
W/I When Issued800.789.ASIA [2742] www.matthewsfunds.com 27
CO-PORTFOLIO MANAGERS SYMBOL: MATFXM A T T H E W S A S I A N T E C H N O L O G Y F U N D
G. Paul Matthews and Mark W. Headley
The Matthews Asian Technology Fund invests at least 80% of its assets in the common and preferred stocks of companies located in Asia which derive a substantial portion 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, Philippines, Singapore, South Korea, Taiwan and Thailand.
PORTFOLIO MANAGER COMMENTARY
The Matthews Asian Technology Fund ended the three-month period down 0.20%, outperforming its benchmark MSCI/Matthews Asian Technology Index, which was down 2.87% over the same period.
A mix of Japanese small caps and Korean Internet stocks contributed to the Fund’s performance, while Taiwanese hardware manufacturers and integrated circuit design firms relatively underperformed. Inventory build-up in a few IT products during the quarter put pressure on Taiwanese original design manufacturers, while Japanese high-end component makers with less price-sensitive products performed relatively better. Korean Internet stocks performed well, despite the overall correction in the Korean market during the quarter.
Exports to China remained steady for Korean and Taiwanese technology companies, despite growing concerns over the short-run risk of a hard landing in China. Exports to China have been growing fast, not only to meet the demand from the manufacturing sector—mostly components for assembly—but also to keep up with domestic consumption demand. On the back of strong earnings recovery in the Japanese technology sector, Japanese companies announced a series of aggressive investment plans in flat-panel displays and semiconductors during the quarter.
During the quarter, the Fund added a few handset and flat-panel display component makers to its portfolio. The Fund continued to underweight Japan, although it has been increasing its weighting in Japan since last year. We remain focused on adding new companies that we believe are well positioned to capture the growth in the Asian technology sector.
28 MATTHEWS ASIAN FUNDS
M A Y 3 1 , 2 0 0 4
FUND HIGHLIGHTS Fund Inception: 12/27/99------------------------------------------------------------------------------------------------------------ AVERAGE ANNUAL RETURNS AS OF MAY 31, 2004* ------------------------------------------------------------------------------------------------------------ SINCE 3 MTHS 1 YR 3 YRS INCEPTION ------------------------------------------------------------------------------------------------------------ Matthews Asian Technology Fund -0.20% 58.49% 5.92% -13.04% MSCI/Matthews Asian Technology Index(1) -2.87% 39.85% -2.66% -18.93% Lipper Science and Technology Funds Category Average(2) -4.50% 23.95% -10.26% -19.49%+ ------------------------------------------------------------------------------------------------------------ +From 12/31/99 ------------------------------------------------------------------------------------------------------------ MATTHEWS ASIAN TECHNOLOGY FUND AVERAGE ANNUAL RETURNS AS OF*: ------------------------------------------------------------------------------------------------------------ SINCE 1 YR 3 YRS INCEPTION ------------------------------------------------------------------------------------------------------------ March 31, 2004 96.02% 9.08% -12.92% June 30, 2004 47.92% 7.59% -12.82% ------------------------------------------------------------------------------------------------------------ *Assumes reinvestment of all dividends. Past performance is not indicative of future results. Unusually high returns may not be sustainable. ------------------------------------------------------ OPERATING EXPENSES(3) ------------------------------------------------------ For nine months ended 5/31/04, annualized** 2.00% For Fiscal Year 2003 (ended 8/31/03)*** 2.00% ------------------------------------------------------ **Unaudited ***Audited ------------------------------------------------------ PORTFOLIO TURNOVER(4) ------------------------------------------------------ For nine months ended 5/31/04, annualized** 36.66% For Fiscal Year 2003 (ended 8/31/03)*** 72.03% ------------------------------------------------------ ---------------------------------------- COUNTRY ALLOCATION++ ---------------------------------------- Japan 31% South Korea 23% China/Hong Kong 18% Taiwan 12% Thailand 4% Singapore 4% India 4% Indonesia 2% Australia 1% Cash 1% ---------------------------------------- ---------------------------------------- SECTOR ALLOCATION++ ---------------------------------------- Information Technology 58% Telecommunication Services 18% Consumer Discretionary 14% Health Care 4% Materials 3% Industrials 2% Cash 1% ---------------------------------------- ---------------------------------------- MARKET CAP EXPOSURE++ ---------------------------------------- Large cap (over $5 billion) 42% Mid cap ($1-$5 billion) 32% Small cap (under $1 billion) 25% Cash 1% ---------------------------------------- ++Percentage figures are rounded. -------------------------------------------------------------------------------- NAV ASSETS REDEMPTION FEE 12b-1 FEES -------------------------------------------------------------------------------- $5.10 $39.2 million 2.00% within 90 days None --------------------------------------------------------------------------------All data is as of May 31, 2004, unless otherwise noted.
1 The MSCI/Matthews Asian Technology Index is an unmanaged 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. Source: Morgan Stanley Capital International. 2 As of 5/31/04, the Lipper Science and Technology Funds Category Average consisted of 323 funds for the three-month period, 315 funds for the one-year period, 274 funds for the three-year period, and 136 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. 3 Includes management fee, shareholder services fees and other expenses. Matthews Asian Funds do not charge 12b-1 fees. 4 The lesser of fiscal year-to-date purchase costs or sales proceeds divided by the average monthly market value of long-term securities.800.789.ASIA [2742] www.matthewsfunds.com 29
M A T T H E W S A S I A N T E C H N O L O G Y F U N D
SCHEDULE OF INVESTMENTS (Unaudited)
EQUITIES: 98.90%*
SHARES VALUE ============================================================================ JAPAN: 31.11% Niws Co., Ltd. 503 $1,469,975 NTT DoCoMo, Inc. 676 1,272,183 Nintendo Co., Ltd. 12,685 1,271,656 Access Co., Ltd. W/I ** 44 1,190,319 Matsushita Electric Industrial Co., Ltd. 85,000 1,173,581 Sharp Corp. 66,000 1,117,267 Arisawa Manufacuring Co., Ltd. 19,580 876,915 Canon, Inc. ADR 17,500 867,300 Nakanishi, Inc. 11,000 700,656 Usen Corp. ** 2,960 610,613 Yushin Precision Equipment Co., Ltd. 25,245 510,496 Pentax Corp. 95,000 461,570 Disco Corp. 8,000 359,737 Access Co., Ltd. ** 11 297,580 Total Japan 12,179,848 ============================================================================ SOUTH KOREA: 23.39% Samsung Electronics Co., Ltd. 3,268 1,458,741 Internet Auction Co., Ltd. ** 17,586 1,375,239 NCsoft Corp. ** 13,463 1,109,445 NHN Corp. 9,782 906,868 SK Telecom Co., Ltd. 5,079 863,249 Kumho Electric, Inc. 16,807 755,987 LG Life Sciences, Ltd. ** 26,212 625,520 Daeduck GDS Co., Ltd. 62,820 538,711 Amotech Co., Ltd. 27,682 503,763 KT Corp. ADR 27,600 481,620 Power Logics Co., Ltd. ** 32,624 462,077 Sanghwa Micro Technology, Inc. 5,350 78,072 Total South Korea 9,159,292 ============================================================================ SHARES VALUE ============================================================================ CHINA/HONG KONG: 18.10% China Mobile HK, Ltd. ADR 83,000 $1,191,050 ASM Pacific Technology, Ltd. 241,000 961,662 TPV Technology, Ltd. 1,152,000 812,943 TCL International Holdings, Ltd. 2,352,000 807,247 SINA Corp. ** 21,400 775,536 Lenovo Group, Ltd. 2,327,000 731,489 Asia Satellite Telecommunications Holdings, Ltd. 416,900 652,585 Comba Telecom Systems Holdings, Ltd. ** 1,248,000 636,498 BYD Co., Ltd. H Shares 148,500 519,204 Total China/Hong Kong 7,088,214 ============================================================================ TAIWAN: 12.02% Hon Hai Precision Industry Co., Ltd. 294,429 1,205,987 Taiwan Semiconductor Manufacturing Co., Ltd. ** 651,668 1,134,186 Quanta Computer, Inc. 411,100 937,542 LITE-ON IT Corp. 257,750 750,240 Sunplus Technology Co., Ltd. 331,450 676,327 Total Taiwan 4,704,282 ============================================================================ THAILAND: 4.29% Advanced Info Service Public Co., Ltd. 556,600 1,207,316 Shin Satellite Public Co., Ltd. 1,492,000 470,732 Total Thailand 1,678,048 ============================================================================30 MATTHEWS ASIAN FUNDS
M A Y 3 1 , 2 0 0 4
SHARES VALUE ============================================================================ SINGAPORE: 3.60% Venture Corp., Ltd. 132,600 $1,411,177 Total Singapore 1,411,177 ============================================================================ INDIA: 3.46% Infosys Technologies, Ltd. 8,039 895,616 Wipro, Ltd. 13,800 457,416 Total India 1,353,032 ============================================================================ INDONESIA: 2.36% PT Telekomunikasi Indonesia ADR 57,200 923,780 Total Indonesia 923,780 ============================================================================ AUSTRALIA: 0.57% Novogen, Ltd. ** 60,532 222,025 Total Australia 222,025 ============================================================================ TOTAL INVESTMENTS: 98.90% 38,719,698 (Cost $34,772,463***) CASH AND OTHER ASSETS, LESS LIABILITIES: 1.10% 431,532 ----------- NET ASSETS: 100.00% $39,151,230 ============================================================================* As a percentage of net assets as of May 31, 2004
** Non-income producing security
*** Cost of investments is $34,772,463 and net unrealized appreciation consists of:Gross unrealized appreciation.........$6,040,730 Gross unrealized depreciation.........(2,093,495) ---------- Net unrealized appreciation...........$3,947,235 ==========ADR American Depositary Receipt
GDS Global Depositary Shares
W/I When Issued800.789.ASIA [2742] www.matthewsfunds.com 31
PORTFOLIO MANAGERS This Fund is team-managed. SYMBOL: MPACXM A T T H E W S A S I A P A C I F I C F U N D
The Matthews Asia Pacific Fund invests at least 80% of its assets in the common and preferred stocks of companies located in the Asia Pacific region. The Fund may also invest in the convertible securities of companies located in Asia.
Asia includes China, Hong Kong, India, Indonesia, Japan, Malaysia, Philippines, Singapore, South Korea, Taiwan and Thailand. The Asia Pacific region includes the markets of Asia, as well as Australia, New Zealand, and Pakistan.
PORTFOLIO MANAGER COMMENTARY
Since the Matthews Asia Pacific Fund’s launch on October 31, 2003, the Fund has performed in line with the broad Asia Pacific universe. For the three months ended May 31, 2004, the Fund was down 0.09% versus a drop of 1.08% in the MSCI All Country Asia Pacific Free Index. While the Fund performed similarly to the index, its country and industry weightings are very different. Exposure to large Japanese stocks has been increased in recent months to almost 40%, but this is still far lower than the approximately 60% found in the index. Australia, Taiwan and Malaysia are also major index components where the Fund has limited or no exposure. The Fund strives to capture a forward looking view of corporate Asia’s potential, rather than the backward view that we believe indexes in general often represent.
During the fiscal quarter, the Fund’s top five contributors to performance were all Japanese companies, most notably financial companies. Several domestically focused Korean companies were also strong performers. Broad weakness in both the China/Hong Kong and Indian markets hurt returns. Japan’s domestic economy continues to show signs of significant improvement, and we believe that the outlook for corporate profits is improving. In contrast, China-related companies have suffered sharp corrections after very strong recent performance and concerns about the potential for overheating in the domestic economy. Indian stocks have also given up some of the considerable gains seen in the last year, with a very sharp drop accompanying the surprise win of the Congress Party—the same party that led India into decades of failed policies after independence.
The Fund is fully invested and well diversified across the vast Asia Pacific region. Our multiyear bias toward domestically generated earnings is seen in the strong weightings in consumer/retail and financial-related companies. A select group of highly competitive, technologically advanced exporters is also a major component of the Fund.
32 MATTHEWS ASIAN FUNDS
M A Y 3 1 , 2 0 0 4
FUND HIGHLIGHTS Inception: 10/31/03---------------------------------------------------------------------------------------- TOTAL RETURN AS OF MAY 31, 2004* ---------------------------------------------------------------------------------------- SINCE 3 MTHS INCEPTION ---------------------------------------------------------------------------------------- Matthews Asia Pacific Fund -0.09% 7.60% MSCI All Country Asia Pacific Free Index(1) -1.08% 7.57% ---------------------------------------------------------------------------------------- *Past performance is not indicative of future results. ---------------------------------------------------- OPERATING EXPENSES(2) ---------------------------------------------------- Since inception to 5/31/04, annualized** 1.72% ---------------------------------------------------- **Unaudited ---------------------------------------------------- PORTFOLIO TURNOVER(3) ---------------------------------------------------- Since inception to 5/31/04, annualized** 10.93% ---------------------------------------------------- ---------------------------------------- COUNTRY ALLOCATION++ ---------------------------------------- Japan 37% China/Hong Kong 23% South Korea 14% Singapore 7% Australia 5% India 4% Thailand 4% Indonesia 2% Taiwan 2% United Kingdom(1) 1% Cash 2% ---------------------------------------- ---------------------------------------- SECTOR ALLOCATION++ ---------------------------------------- Financials 27% Consumer Discretionary 26% Information Technology 16% Telecommunication Services 11% Consumer Staples 7% Industrials 5% Utilities 2% Health Care 2% Energy 1% Materials 1% Cash 2% ---------------------------------------- ---------------------------------------- MARKET CAP EXPOSURE++ ---------------------------------------- Large cap (over $5 billion) 46% Mid cap ($1-$5 billion) 41% Small cap (under $1 billion) 11% Cash 2% ---------------------------------------- ++Percentage figures are rounded. -------------------------------------------------------------------------------- NAV ASSETS REDEMPTION FEE 12b-1 FEES -------------------------------------------------------------------------------- $10.76 $69.2 million 2.00% within 90 days None --------------------------------------------------------------------------------All data is as of May 31, 2004 unless otherwise noted.
1 The MSCI All Country Asia Pacific Free Index is a free float-adjusted market capitalization index measuring the equity market performance in 14 emerging and developed markets of the Asia Pacific region. As of May 31, 2004, 0.97% of the assets in the Matthews Asia Pacific Fund were invested in the United Kingdom, which is not included in the MSCI All Country Asia Pacific Free Index. Source: Bloomberg. 2 Includes management fee, shareholder services fees and other expenses. Matthews Asian Funds do not charge 12b-1 fees. 3 The lesser of fiscal year-to-date purchase costs or sales proceeds divided by the average monthly market value of long-term securities.800.789.ASIA [2742] www.matthewsfunds.com 33
M A T T H E W S A S I A P A C I F I C F U N D
SCHEDULE OF INVESTMENTS (Unaudited)
EQUITIES: 97.88%*
SHARES VALUE ============================================================================ JAPAN: 37.22% The Sumitomo Trust and Banking Co., Ltd. 248,000 $1,528,052 Seven-Eleven Japan Co., Ltd. 44,000 1,389,369 Gulliver International Co., Ltd. 12,470 1,318,926 Nissin Healthcare Food Service Co., Ltd. 76,150 1,315,960 Fuji Television Network, Inc. 573 1,306,456 Secom Co., Ltd. 31,500 1,268,265 Niws Co., Ltd. 433 1,265,406 Canon, Inc. ADR 25,300 1,253,868 Nomura Holdings, Inc. 81,000 1,241,475 Matsushita Electric Industrial Co., Ltd. 86,000 1,187,387 Makita Corp. 83,000 1,163,990 Yamaha Corp. 76,200 1,154,117 Nintendo Co., Ltd. 11,500 1,152,861 T&D Holdings, Inc. 26,730 1,119,746 Sharp Corp. 66,000 1,117,268 Mizuho Financial Group, Inc. 255 1,098,213 Shimano, Inc. 43,400 1,022,909 Ito En, Ltd. 22,400 962,678 NTT DoCoMo, Inc. 454 854,395 Nippon Telegraph & Telephone Corp. ADR 24,400 608,536 Toppan Forms Co., Ltd. 43,100 576,357 Honda Motor Co., Ltd. 13,200 568,487 Nippon Telegraph & Telephone Corp. 102 501,117 NTT DoCoMo, Inc. ADR 21,400 398,682 Honda Motor Co., Ltd. ADR 18,100 390,960 ---------- Total Japan 25,765,480 ============================================================================ SHARES VALUE ============================================================================ CHINA/HONG KONG: 22.90% Dah Sing Financial Group 215,200 $1,449,595 Swire Pacific, Ltd. A Shares 210,000 1,353,943 Giordano International, Ltd. 2,028,000 1,242,472 PCCW, Ltd. ** 1,710,000 1,162,832 China Mobile HK, Ltd. ADR 66,800 958,580 ASM Pacific Technology, Ltd. 231,000 921,759 PICC Property and Casualty Co., Ltd. H Shares** 2,190,000 864,041 BYD Co., Ltd. H Shares 230,000 804,155 Lenovo Group, Ltd. 2,376,000 746,892 Sa Sa International Holdings, Ltd. 1,936,000 720,358 Sun Hung Kai Properties, Ltd. 80,000 680,019 Hong Kong and China Gas Co., Ltd. 421,000 664,404 CNOOC, Ltd. ADR 14,200 610,032 SINA Corp. ** 16,800 608,832 Shangri-La Asia, Ltd. 620,000 608,553 China Pharmaceutical Group, Ltd. 1,962,000 591,578 China Telecom Corp., Ltd. H Shares 1,742,000 547,595 Cosco Pacific, Ltd. 360,000 498,852 Denway Motors, Ltd. 572,000 267,876 China Mobile HK, Ltd. 80,500 230,328 Huaneng Power International, Inc. H Shares 184,000 171,160 Huaneng Power International, Inc. ADR 4,000 148,800 ---------- Total China/Hong Kong 15,852,656 ============================================================================34 MATTHEWS ASIAN FUNDS
M A Y 3 1 , 2 0 0 4
SHARES VALUE ============================================================================ SOUTH KOREA: 13.59% Amorepacific Corp. 6,200 $1,067,084 S1 Corp. 48,400 1,046,981 Shinhan Financial Group Co., Ltd. 46,400 750,796 Kookmin Bank ADR 21,240 731,930 Internet Auction Co., Ltd. ** 9,308 727,893 LG Home Shopping, Inc. 23,522 726,891 NCsoft Corp. ** 8,780 723,533 Samsung Electronics Co., Ltd. 1,600 714,194 SK Telecom Co., Ltd. ADR 32,100 669,927 Samsung Fire & Marine Insurance Co., Ltd. 9,130 585,442 Hyundai Motor Co., Ltd. 14,690 563,666 Nong Shim Co., Ltd. 2,590 486,897 Kookmin Bank ** 9,920 344,873 SK Telecom Co., Ltd. 1,580 268,544 --------- Total South Korea 9,408,651 ============================================================================ SINGAPORE: 6.81% Venture Corp., Ltd. 132,600 1,411,177 DBS Group Holdings, Ltd. 165,700 1,373,729 Fraser and Neave, Ltd. 143,800 1,141,438 Hyflux, Ltd. 926,875 790,221 --------- Total Singapore 4,716,565 ============================================================================ AUSTRALIA: 4.85% AXA Asia Pacific Holdings, Ltd. 663,474 1,609,741 Australia and New Zealand Banking Group, Ltd. 102,823 1,330,274 BHP Billiton, Ltd. 47,425 407,800 --------- Total Australia 3,347,815 ============================================================================ INDIA: 3.59% HDFC Bank, Ltd. 114,104 929,499 Dr. Reddy's Laboratories, Ltd. 43,880 858,024 Hero Honda Motors, Ltd. 70,000 697,378 --------- Total India 2,484,901 ============================================================================ SHARES VALUE ============================================================================ THAILAND: 3.53% Advanced Info Service Public Co., Ltd. 548,900 $1,190,614 Bangkok Bank Public Co., Ltd. ** 530,400 1,255,075 ---------- Total Thailand 2,445,689 ============================================================================ INDONESIA: 2.43% PT Astra International 1,367,500 847,776 PT Ramayana Lestari Sentosa 1,912,500 835,108 --------- Total Indonesia 1,682,884 ============================================================================ TAIWAN: 1.99% Hon Hai Precision Industry Co., Ltd. 337,000 1,380,360 --------- Total Taiwan 1,380,360 ============================================================================ UNITED KINGDOM: 0.97% HSBC Holdings PLC ADR 9,000 666,270 ---------- Total United Kingdom 666,270 ============================================================================ TOTAL INVESTMENTS: 97.88% 67,751,271 (Cost $68,198,564***) CASH AND OTHER ASSETS, LESS LIABILITIES: 2.12% 1,466,710 ----------- NET ASSETS: 100.00% $69,217,981 ============================================================================* As a percentage of net assets as of May 31, 2004
** Non-income producing security
*** Cost of investments is $68,198,564 and net unrealized depreciation consists of:Gross unrealized appreciation.........$3,224,243 Gross unrealized depreciation.........(3,671,536) ---------- Net unrealized appreciation........... $(447,293) ==========ADR American Depositary Receipt800.789.ASIA [2742] www.matthewsfunds.com 35
M A Y 3 1 , 2 0 0 4
M A T T H E W S A S I A N F U N D S
BOARD OF TRUSTEES
Disinterested Trustees:
Richard K. Lyons, Chairman
Robert K. Connolly
Toshi Shibano
Interested Trustees1:
David FitzWilliam-Lay
G. Paul Matthews
OFFICERS
G. Paul Matthews
Mark W. Headley
James E. Walter
Downey H. Blount
INVESTMENT ADVISOR
Matthews International Capital Management, LLC
Four Embarcadero Center, Suite 550
San Francisco, CA 94111
800-789-ASIA [2742]
ACCOUNT SERVICES
PFPC Inc.
760 Moore Road
King of Prussia, PA 19406
800-789-ASIA [2742]
CUSTODIAN
The Bank of New York
One Wall Street
New York, NY 10286
LEGAL COUNSEL
Paul, Hastings, Janofsky & Walker, LLP
55 Second Street
San Francisco, CA 941051 As defined under the Investment Company Act of 1940, “Interested” trustees are so defined due to an ownership interest in the Advisor or an office held with the Trust.
36 MATTHEWS ASIAN FUNDS
