Source: the finishing touch of Zhongjin
Analyst: Wang Hanfeng, Liu Gang and Kou Yue
Last Friday (November 19), Hang Seng Index released its regular third-quarter index adjustment results, covering major flagship indices of Hong Kong stocks such as Hang Seng, State-owned Enterprises Index and Hang Seng Technology Index; in addition, the Hang Seng Composite Index, which directly determines the investment scope of Hong Kong stocks, has also been partially adjusted.
On the whole, this adjustment involves a wide range and has a great impact, and the comprehensive analysis of the impact of CICC can be used as a reference for investors.
Hang Seng, State-owned Enterprises and Technology Index Adjustment: the Hang Seng Index was expanded to 64, and JD.com, ENN Energy, China Resources Beer and NetEase, Inc were included
Changes in constituent stocks: JD.com-SW, ENN Energy, China Resources Beer and NetEase, Inc-S are included in the Hang Seng Index; INNOVENT BIO is included in the Hang Seng state-owned enterprises.
1) Hang Seng Index:The adjustment will include four stocks, JD.com-SW, ENN Energy, China Resources Beer, and NetEase, Inc-S, with weights of 1.54%, 0.81%, 0.78% and 0.67%, respectively; unmarked ones are removed. After adjustment, the number of constituent shares further increased from 60 to 64.
2) Hang Seng State-owned Enterprises:This adjustment includes INNOVENT BIO, with a weight of 1.26%, while China Evergrande Group is excluded, and the weight before elimination is 0.07%. The number of constituent shares is maintained at 50.
3) Hang Seng Technology:The number of constituent stocks remained unchanged and the number remained at 30.
The above inclusion list is generally consistent with our previous preview results, and there are some differences, as we said in the report. this is mainly because the final result of the adjustment of the Hang Seng series index is not entirely based on the quantitative criteria and will also be affected by the subjective decision of the Hang Seng Index Adjustment Committee, thus making it more difficult to predict according to the quantitative criteria alone.
For example, JD.com-SW and NetEase, Inc-S are at the forefront of our predictions, while ENN Energy and China Resources Beer are both on our long list selected according to quantitative criteria, but it is impossible to accurately predict whether they will be included. In addition, the change of the new adjustment standard after the systematic optimization of the Hang Seng Index will also have a certain impact, such as the change in the number of final constituent stocks.
Potential passive capital flow impact: pay attention to the positive impact on ENN Energy, China Resources Beer, JD.com, etc.
Based on the current Bloomberg summary, the amount of ETF that tracks the Hang Seng Index is about $21.1 billion, while that of the ETF tracking the China Enterprises Index and the Hang Seng Technology Index is about $4.1 billion and $1.9 billion, respectively. Combined with the changes in equity weight of the above components, we measure its potential passive capital flow. Further combined with the average daily turnover of individual stocks over the past three months, we can measure the possible impact of changes in passive funds:
1) Hang Seng Index:ENN Energy, China Resources Beer, JD.com Group-SW and NetEase, Inc-S, which need the most time for passive capital inflows, are expected to take 3.4,3,1.8 and 1.3 days; on the contrary, New World Development and Huifeng shares are all expected to take half a day. As the weighting ratio of Meituan-W, Tencent and BABA is reset to 8% from 9.5%, 8.6% and 8.1% before the adjustment, we expect to bring in outflows of US $320 million, 120 million and 10 million.
2) Hang Seng State-owned Enterprises:INNOVENT BIO, who needs the most time for passive capital inflow, expects the transaction time to be about 1 day; in the passive capital outflow of the required transaction, Meituan-W is expected to bring a capital outflow of US $58.38 million because the weight is reset from 9.4% to 8%. The estimated outflow time is about 0.1 days; in addition, China Evergrande Group estimated that the outflow time is less than 0.1 days because the elimination of the index may bring about $2.9 million outflow.
3) Hang Seng Technology:Although there is no change in the constituent shares, the weights of Meituan-W, Kuaishou Technology-W, JD.com-SW and Tencent will be reset to 8% from the current 9.29%, 8.73%, 8.64% and 8.36%, respectively, and are expected to generate outflows of $24.24 million, $13.72 million, $12.03 million and $6.76 million, respectively.
New features of the index: the new economy sector accounts for half of the Hang Seng Index; the coverage of the information technology industry, public utilities and large consumer sectors has increased.
► Hang Seng Index expansion: after this adjustment, the number of Hang Seng Index constituent stocks increased from 60 to 64, further showing the trend of expansion. According to the results of a consultation released by the Hang Seng Index in March, the number of Hang Seng Index stocks will increase to 80 by mid-2022 and will eventually be fixed at 100.
► industry representativeness: the coverage of the information technology, public utilities and telecommunications industries and the large consumer sector has increased significantly. With reference to the Hang Seng Index's industry classification (that is, seven industry categories), after the adjustment of the Hang Seng Index, the coverage of information technology, utilities and telecommunications and non-essential and essential consumption has increased, with 11ppt, 5.1ppt and 2.6ppt increasing to 86.6%, 61.5% and 40.5%, respectively.
Compared with the simulation results given by Hang Seng Index in March consultation, there is still a large gap in the coverage of various industries after this adjustment, which we believe is mainly due to the fact that the number of constituent stocks is still far below the target. However, the general direction of further optimization will still be reflected, and we expect the share of the new economy to further increase.
Chart: after this adjustment, the market coverage of the information technology, public utilities and telecommunications industries of the Hang Seng Index has increased significantly.
Source: Bloomberg,Wind, China International Capital Corporation Research Department
Chart: within the Hang Seng Index, the proportion of the information technology industry and unnecessary and essential consumer industries in the Hang Seng Index has increased.
Source: Bloomberg,Wind, China International Capital Corporation Research Department
► New economy proportion: the New economy plate accounts for half of the Hang Seng Index.
After the adjustment of the above index, the market capitalization of the new economy sector of the Hang Seng Index reached 48.4%, accounting for almost half of the Hang Seng Index as a whole, while this figure was only 41.3% in the first half of the year, a slight increase from the current 48.1%. The proportion of the new economy in the Hang Seng China Enterprises Index reached 63.2%, up from 60% in the first half of the year and 62.2% at present, mainly due to the increase in the share of the communications services sector (expected to increase 1ppt compared with the current).
Chart: after the optimization of the Hang Seng Index, the new economy plate accounts for half of the country.
Source: Bloomberg,Wind, China International Capital Corporation Research Department
Chart: new economy accounts for more than 60% after adjustment of Hang Seng China Enterprises Index
Source: Bloomberg,Wind, China International Capital Corporation Research Department
Potential adjustment of Hong Kong Stock Connect: Tengsheng Bo Pharmaceutical-B, Medical Maitong and Helen may meet the requirements for inclusion of the Shanghai-Hong Kong Stock Connect.
Since this is a quarterly index adjustment, for the Hang Seng Composite Index, which is adjusted every half year, only stocks that meet the rapid inclusion mechanism will be considered for inclusion.
Specifically, this time, three companies have been included in the Hang Seng Composite medium Index, namely Tengsheng Boyao-B, Medical Maitong and Helen. According to the adjustment of the Hang Seng Composite Index announced by the Index Company and the additional requirements included in the Hong Kong Stock Connect, we expect that the above three companies will meet the requirements for inclusion in the investment scope of the Hong Kong Stock Connect or will be included in the Hong Kong Stock Exchange. The final target change shall be subject to the information released by the Shanghai Stock Exchange and the Shenzhen Stock Exchange.
Chart: adjustment of the investment scope of Hong Kong Stock Connect due to the adjustment of the Hang Seng Composite Index
Source: Bloomberg, China International Capital Corporation Research Department
Note: data as of November 19, 2021; predictions are consistent with Bloomberg expectations
Timetable: the index and Shanghai-Hong Kong Stock Connect adjustment will take effect on December 6.
In terms of timing, the above index adjustment results will be officially implemented on Monday, December 6. During this period, some active funds still do not rule out taking certain arbitrage operations according to the results of the adjustment announcement, but the passive funds will choose to adjust their positions on the trading day before the effective date (that is, December 3) in order to minimize the tracking error.
We expect that the relevant stocks will be traded at that time or will be much larger than the usual "abnormal volume" situation, especially in late trading.
After the index adjustment takes effect on December 6, the Shanghai and Shenzhen exchanges will then (depending on the announcement of the exchange) adjust the scope of investment targets of the Shanghai-Shenzhen-Hong Kong Stock Connect accordingly.
Chart: ETF fund size tracking Hang Seng Index, Hang Seng China Enterprises Index and Hang Seng Technology Index
Source: Bloomberg, China International Capital Corporation Research Department; Note: data as of November 19, 2021
Chart: hang Seng Index Adjustment and Capital flow
Source: Bloomberg, China International Capital Corporation Research Department
Note: grey is the new inclusion; the data is as of November 19, 2021; the forecast value is the Bloomberg consensus expectation.
Chart: hang Seng State Enterprises Index Adjustment and Capital flow
Source: Bloomberg, China International Capital Corporation Research Department
Note: Gray is the new inclusion; blue is the call-up; the data is as of November 19, 2021; the forecast is the Bloomberg consensus.
Chart: equity weight adjustment and capital flow of Hang Seng Technology Index
Source: Bloomberg, China International Capital Corporation Research Department
Note: data as of November 19, 2021; predictions are consistent with Bloomberg expectations
Edit / Viola