China Evolution Equity Fund

Investment involves risk. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.

Overview

Manager's Outlook

We believe that China remains a fertile hunting ground for investors seeking to identify sustainable businesses that could emerge as future winners and market leaders.

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We think that China is poised for a gradual economic recovery as the broad package of policy support provides a significant tailwind. Benign inflation in contrast to the decades-high readings seen in other economies gives China the leeway to loosen policy. Moreover, the relaxation of lockdowns and easing of restrictions rapidly normalised the supply chains. The relaxation of rules to allow increased mobility are meant to ease the burden and cushion the impact of China's zero-COVID approach, in our view.

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We think that the undemanding valuations of Chinese equities compared to their global counterparts creates an attractive entry point for active long-term investors. China's decision to make economic stability paramount following structural reforms augurs well for a steady economic recovery that will provide a conducive backdrop for quality businesses to thrive in China, in our view.

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Our portfolio maintains overweight positions in the industrial and business services, consumer discretionary, and real estate sectors as we believe that select businesses in these industries have strong competitive advantages and that the favorable slew of policy support will be a tailwind for these companies to grow their market share.

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In the real estate sector, we think that the policy-induced slowdown will likely stabilize following government support and easing measures particularly at local government levels.

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We believe policy clarity will improve, limiting the unpredictability that had roiled markets and allowing investors to focus more on company fundamentals. Some policies can lead to short-term volatility, but they may also create opportunities and accelerate innovation. We believe that long-term outcomes can be improved if the government can balance better equity with preserving entrepreneurship.

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We recognize there are key risks to the portfolio and remain vigilant in monitoring them. This includes a prolonged Russia-Ukraine conflict, which could keep energy and commodity prices higher for longer, and an unrelenting surge of coronavirus cases, which could trigger sporadic lockdowns that disrupt production and spending.

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We remain rooted in our fundamental research, and we believe that our edge when it comes to understanding companies and identifying future leaders will eventually prevail over current market fears. ��

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Strategy

Fund Summary

Actively managed and invests mainly in a diversified portfolio of shares of Chinese companies and may have significant exposure to smaller capitalisation companies.

Performance - Net of Fees

Past performance is not a guarantee or a reliable indicator of future results. Source for performance: T. Rowe Price. Fund performance is calculated using the official NAV with distributions reinvested, if any. The value of your investment will vary and is not guaranteed. It will be affected by changes in the exchange rate between the base currency of the fund and the currency in which you subscribed, if different. Sales charges, taxes and other locally applied costs have not been deducted and if applicable, they will reduce the performance figures. Performance data will be displayed when a share class has more than 1 year history of returns.

30-Nov-2023 - Wenli Zheng Portfolio Manager,

Chinese equities recorded gains in November in US dollar terms amid hopes of a pivot to more growth-supportive policies, helped by reduced friction with the US following the meeting between US President Joe Biden and Chinese leader Xi Jinping. Within the portfolio, stock selection in information technology boosted relative returns. In particular, our off-benchmark position in a provider of backend equipment for the semiconductor industry helped due to the increasing adoption of advanced packaging in the seminconductor industry. Owning shares of a liquid crystal display maker for automobiles worked well for the fund as the market reacted positively to the company expanding its customer base. Our lack of exposure to financials also served us well due to weakness in insurers and lacklustre third-quarter results. Consumer discretionary lifted relative returns further, thanks to stock selection. Not owning an e-commerce group was beneficial due to market disappointment over its restructuring plans. Among stocks we own, our position in an electric vehicle startup contributed due to its record November sales. Conversely, stock selection in consumer staples hurt. Owning a brewer detracted due to concerns about a recovery in consumption.

30-Nov-2023 - Wenli Zheng Portfolio Manager,

Industrials and business services was our largest sector position. We favour companies that benefit from the structural trends of industrial or technology upgrading. In this sector, we own names that will likely gain from the electrification trend, such as a component maker for electric vehicles (EVs), a relay producer for EVs, and a maker of aerial work platforms that is transitioning from diesel-powered models to electric ones. We also hold shares in an electrical equipment company that benefits from the digitisation of China’s power grid and a shipbuilder that has profited from a favourable supply-demand outlook and industry consolidation.

30-Jun-2022 - Wenli Zheng Portfolio Manager,

We bought shares of Yantai Jereh Oilfield Services, a manufacturer of oilfield equipment such as those used in fracturing shale to extract oil and gas.�
We invested in China Oilfield Services, one of the largest Chinese oil services companies engaged in offshore drilling, well services, marine support, and geophysical services.
KE Holding is an integrated an integrated online and offline platform for housing transactions. We bought shares of KE Holdings because we think it will benefit from the potential recovery of the property cycle in the second half of the year. The company delivered consensus-beating first-quarter results. The acquisition of KE Holdings shares also ties into our belief that the market opportunity has changed to aftermarket services from property development given the former's potential for longer-term growth.
We sold some shares of Country Garden Services, a property management firm, and China Resources Land, the only property developer we own, to fund the purchase of KE Holdings shares.
We topped up our position in China Resources Mixc Lifestyle Services, a residential and commercial property management company, which was spun off from China Resources Land. Renowned for managing shopping malls, China Resources Mixc has one of the country's largest portfolios of high-end malls.� In our view, the stock is a way to benefit from the consumption upgrade in China.
We bought shares of Yum China Holdings, the license holder of fast-food chain brands in China such as KFC, Pizza Hut, and Taco Bell. We view Yum China as an earnings compounder and a reopening and COVID-off beneficiary. We think the underlying fundamentals of its business are solid despite the disruptions from COVID. We like its strong balance sheet and increasing commitment to return value to shareholders.
H World, formerly known as Huazhu, is one of the top hotel chain operators and franchisors in China. With the relaxation of COVID-induced mobility curbs in the quarter, we expect it to benefit from the return of domestic travel.
We bought shares of Pop Mart International, a collectible toy maker that is known for its trademark "blind boxes" which contain unidentified characters, a format that drives repeated sales as customers, mostly affluent teenagers and young adults, seek to secure the rarest collectibles. We like the company's robust intellectual property capabilities, good product offerings, fast-growing membership, and a high repurchase rate.
Autel Intelligent is a supplier of auto intelligent diagnostic systems. We eliminated our position given the rising costs of chips and shipping, as well as research and development expenses which weighed on the stock.
We bought shares of Zhejiang Hangke Tech, a lithium battery back-end equipment supplier because we believe it will likely benefit from margin recovery, driven by the strong capital expenditure cycle ahead in the global lithium battery industry. Major lithium battery manufacturers have announced capacity expansions driven by strong demand from EV and energy storage systems.� Hangke's order backlog acceleration and margin recovery will likely be boosted by the capex cycle of Korean battery makers, which are among its major clients.
We sold all shares in Ocean's King Lighting Service as heightened competition has negatively affected this leading industrial lighting solution provider.
We sold out of Win Semiconductors, one of the largest foundries for nonsilicon-based semiconductor components, given its global exposure as its products are mainly sold to the U.S. and Europe.
We bought shares in BOE Varitronix, a company engaged in the liquid crystal display (LCD) business, which counts the auto sector as its market. Its market share globally is increasing as EVs are using more screens and larger size panels. BOE is one of a few companies with a more advanced LCD manufacturing facility.

Disclosure on Vendor Indices can be found here.

Risks

Typical Investor