China Evolution Equity Fund

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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

Our approach focuses on uncovering stocks where change and growth are underappreciated or undiscovered. Leveraging our long history of investing in China, we seek to identify innovative companies beyond the widely owned mega cap stocks that offer the long-term potential for durable or accelerating growth or a fundamental rerating. The manager is not constrained by the fund's benchmark, which is used for performance comparison purposes only.

Asia Pacific Excluding Japan

30-Jun-2022 - Wenli Zheng, Regional Portfolio Manager,

During the quarter, we invested in a considerable number of new names. We remain committed to investing in China's future winners and niche market leaders that are currently at the nascent part of their cycle and are overlooked and undiscovered by many investors.

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We made our first foray into the energy sector, where previously we had no exposure, ahead of a potential increase in oil exploration activities. We positioned ourselves in real estate names on the belief that the weak property market, one of China's growth drivers, may stabilize in the second half of the year and eventually recover going forward. We maintain our interest in companies within the EV and renewable energy sectors that are likely secular drivers of growth. China has one of the most comprehensive EV supply chains globally and many international OEMs have their manufacturing headquarters in the country. We sold some stocks with global exposure, including semiconductor names, as we sought to focus on areas that we believe can deliver strong growth despite the specter of a global economic slowdown.

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As a result of our bottom-up stock selection, the portfolio has large overweight positions in industrials and business services, consumer discretionary, and real estate. We believe that the well-run and differentiated businesses we are invested in in these sectors will perform well in an environment where the government is shifting to a pro-growth stance to stabilize the economy.��

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Energy

The biggest shift in our positioning over the quarter was in energy. For the first time since the portfolio's inception, we established positions in the sector focusing on oil services companies. We believe that China will increase its capital expenditure on oil exploration after years of underinvestment to ensure energy security.

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.

Real Estate

In real estate, our preference is to own quality companies which are differentiated and will likely take market share from weaker competitors. Property is one of China's important growth drivers, but it has been weakened by a government clampdown on excessive borrowing from developers last year. Since the start of 2022, cities in China have taken measures to boost demand by mortgage rate cuts, smaller down payments, and subsidies.

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We mostly own property management companies in the sector and during the quarter we shifted some of these positions.

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.

Consumer Discretionary

We have a significant absolute position in consumer discretionary after finding a number of companies that we think are well placed to gain from powerful long-term themes such as increasing household incomes. The portfolio owns a diverse array of companies in the sector including EV makers, furniture manufacturers, and auto component providers. We believe the sector should benefit as consumption picks up following the easing coronavirus restrictions. �We were able to identify some compelling investment opportunities.

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.

Industrial and Business Services

We are constructive toward industrials and business services and found opportunities during the quarter. In our view, the sector should be well placed to perform well as China strives to achieve greater self-sufficiency and growth stability. In this space, we own companies that we believe are good business models or those with strong growth tailwinds. More specifically, we believe our holdings will likely benefit from the industrial infrastructure upgrading trend and greater focus on protecting the environment.

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.

IT

We sold some of our holdings in IT stocks with global exposure including semiconductor names. Instead, we sought to focus on areas with strong growth despite the challenging external environment.

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.

31-Jan-2024 - Wenli Zheng, Portfolio Manager,

In January we increased our allocation to the consumer discretionary sector, where we have a significant absolute position. In this space we own businesses that gain from structural trends such as electrification. We hold shares of an electric vehicle startup and auto parts companies. We invested in a home appliance producer that we think can grow its earnings, driven by its market share gains in the global appliance industry. We also own shares of market share gainers in the sportswear and hotel industry. Recently, we initiated a position in a leading hotel operator and franchisor within China’s upper midscale segment.

30-Jun-2022 - Wenli Zheng, Regional 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.

30-Jun-2022 - Wenli Zheng, Regional Portfolio Manager,

Li Auto, a maker of electric vehicles (EV), was among the key contributors as its shares reached a record high following the unveiling of its new smart sport utility vehicle (SUV), which received strong orders from customers. The successful launch demonstrates the auto maker's strong execution from product definition, supply chain management to marketing. We view the stock as an attractive idiosyncratic opportunity with a good setup for the next 18 months as it launches another three new products. We think it has the potential to become a leading EV original equipment manufacturer (OEM) in China.
Owning shares of Zhejiang Shuanghuan Driveline, an auto gear and shaft maker, added value as auto part names rebounded on the relaxation of restrictions. The government's announcement to cut auto purchase tax lifted sales expectations for this company.
Shares of Kanzhun, one of China's largest online recruitment platforms, outperformed as the country's cyberspace regulator allowed Kanzhun's app to resume user registration following a cybersecurity probe. This development removes the biggest overhang for the stock and, in our view, sends a positive signal to China's internet sector that it can expect a more stable regulatory environment. We are positive about Kanzhun's earnings prospects as we view it as a market share gainer given its innovative business model that offers personalized recommendation feeds and direct chat features. The company has a high free cash flow generative business.
Our avoidance of Tencent Holdings benefited the portfolio as the dominant social media platform in China reported lower-than-expected earnings in one of its toughest quarters. We seek investment opportunities beyond the widely owned mega-cap stocks in China, hence, our lack of exposure to Tencent helped.
Hongfa Technology, a maker of relays used in autos, appliances, and EVs, rebounded strongly as supply bottlenecks eased. We believe the worst of the disruption to its supply chain is behind us.
Our position in Yangzijiang Shipbuilding worked well for the portfolio as shares of the Singapore-listed private shipbuilder rose after securing the approval of shareholders to spin off its investment arm, removing an overhang for the stock.
Shares of Unimicron Technology, a printed circuit board maker, fell sharply, reflecting worries about a downturn in the memory chip industry. We shared the same concern and sold the stock.
Chroma ATE, an automated testing equipment provider, experienced demand headwinds which weighed on the stock. We sold some Chroma shares during the quarter but expect battery and EV-related revenues to gain traction in the second half of 2022 to become new growth drivers. The company is also levered to high-performance computing, which can become a bigger market for Chroma over time.

Benchmark Data Source: MSCI. MSCI index returns are shown with reinvestment of dividends after the deduction of withholding taxes. MSCI and its affiliates and third party sources and providers (collectively, “MSCI”) makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI. Historical MSCI data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.

Past performance is not a reliable indicator of future performance.

Source for performance: T. Rowe Price. Fund performance is calculated using the official NAV with dividends reinvested, if any. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested. It will be affected by changes in the exchange rate between the base currency of the fund and the subscription currency, if different. Sales charges (up to a maximum of 5% for the A Class), taxes and other locally applied costs have not been deducted and if applicable, they will reduce the performance figures.

Daily performance data is based on the latest available NAV.

The Funds are sub-funds of the T. Rowe Price Funds SICAV, a Luxembourg investment company with variable capital which is registered with Commission de Surveillance du Secteur Financier and which qualifies as an undertaking for collective investment in transferable securities (“UCITS”). Full details of the objectives, investment policies and risks are located in the prospectus which is available with the key investor information documents and/or key information document (KID) in English and in an official language of the jurisdictions in which the Funds are registered for public sale, together with the articles of incorporation and the annual and semi-annual reports (together “Fund Documents”). Any decision to invest should be made on the basis of the Fund Documents which are available free of charge from the local representative, local information/paying agent or from authorised distributors. They can also be found along with a summary of investor rights in English at www.troweprice.com. The Management Company reserves the right to terminate marketing arrangements.

Please note that the Fund typically has a risk of high volatility.

The specific securities identified and described in this website do not represent all of the securities purchased, sold, or recommended for the sub-fund and no assumptions should be made that the securities identified and discussed were or will be profitable.

A full list of the currently issued Share Classes including Distributing, Hedged, and Accumulating Categories may be obtained, free of charge and upon request, from the registered office of the Company.

Energy

Real Estate

Consumer Discretionary

Industrial and Business Services

IT

Risks

Typical Investor

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