Source: the finishing touch of Zhongjin
Authors: Liu Gang, Zhang Weihan, Wang Hanfeng

Hang Seng Index Adjustment: focus on the potential possibility of inclusion by some New economy companies

Possible adjustments: based on the adjustment method of the Hang Seng Index, and through the understanding and verification of the non-quantitative adjustment criteria through the previous actual adjustment results, we estimate$Kuaishou Technology-W (01024.HK) $、$JD Health (06618.HK) $、$Li Auto Inc.-W (02015.HK) $、$JD Logistics, Inc. (02618.HK) $、$Smoore International Holdings Limited (06969.HK) $、$Shang Tang-W (00020.HK) $、$China Resources Power Holdings (00836.HK) $、$China Feihe Limited (06186.HK) $、$BeiGene, Ltd. (06160.HK) $、$Bilibili Inc.-W (09626.HK) $与$Kingdee International Software Group (00268.HK) $Et al are at the top of the Hang Seng Index and are likely to be potential candidates for inclusion. Our calculations give priority to market capitalization, and then combined with the representativeness of various industries and other factors. Based on the above forecasts, we measure the possible weights and capital flows of the corresponding stocks.

However, it should be pointed out that historical experience shows that the actual results may be quite different from this simple order-based screening. For example, Kuaishou Technology, JD Health and Kingdee all ranked at the forefront of the past forecasts, but they were not included in the end. It may be that some of the factors that serve as the basis for decision-making by the index advisory committee, such as industry and listing site representativeness, are not specified or quantified. It does not rule out that there are other non-quantitative factors that affect the final decision.

In addition, according to the consultation results released by Hang Seng Index in March 2021, the number of Hang Seng Index constituent stocks plans to increase to 80 by mid-2022, eventually fixed at 100. But on the whole, the overall expansion rate is slower than expected (4 in the first quarter of 2022, 4 in the second quarter and 3 in the third quarter of 2022). At present, there are 76 constituent stocks of the Hang Seng Index, which has not yet reached the phased target of 80.

Adjustment of Hong Kong Stock Connect and Hang Seng Composite Index: it is estimated that 24 companies are expected to be included in the Hong Kong Stock Connect and 15 may be removed.

The adjustment also coincides with the biannual review of the Hang Seng Composite Index (twice a year, with deadlines of June 30 and December 31). At the same time, as the Hang Seng Composite Index is the sample space for Hong Kong Stock Connect investment, its changes will also directly affect the investment scope of Hong Kong Stock Connect Investment, so it is worth paying attention to.

Based on the adjustment method of the Hang Seng Composite Index, combined with the need to meet the additional criteria for inclusion in the Hong Kong Stock Exchange (for example, it can be included in the Hang Seng Composite Index small-cap stock market value of more than HK $5 billion, remove the risk warning implemented by the exchange, be suspended from listing or enter the delisting period of individual stocks Companies with different rights in the same shares also need to meet the additional conditions such as listing for 6 months and 20 days, market value and transaction, etc.). We estimate that this time, a total of 24 stocks may meet the criteria for inclusion in the Hong Kong Stock Connect, including$Bilibili Inc.-W (09626.HK) $、$Oshudan (00973.HK) $、$Samsonite (01910.HK) $、$Wei long (09985.HK) $、$Sangao Holdings (00412.HK) $、$Star Chinese (06698.HK) $、$Sipai Health (00314.HK) $、$3D MEDICINES-B (01244.HK) $、Longguang Group (03380.HK) $、$Boan Bio-B (06955.HK) $、$Beijing Oriental Jingdian (00710.HK) $、$Gao Wei Electronics (01415.HK) $、$Kingsoft Cloud Holdings (03896.HK) $、$high vision medical (02407.HK) $、$06929.HK (karma) $、$Feitian Cloud (06610.HK) $、$New Special Energy (01799.HK) $、$Shangmei (02145.HK) $、$Jianshi Technology-B (09877.HK) $、$Youlian Lease (1000) (01563.HK) $、$Concord New Energy (00182.HK) $、China Heart-to-Heart Fertilizer (01866.HK) $、$Sunshine Insurance (06963.HK) $和$Tehai International (09658.HK) $。In addition, due to some limitations in the accuracy of the publicly available data, we accept a fault tolerance rate of 1%, that is, the threshold for inclusion of 94% coverage required by the Hang Seng Composite Index is relaxed to 95%, under this assumption.Zhongguang Nuclear Mining (01164.HK) $、$Riverside Service (03316.HK) $、$Yuexiu Service (06626.HK) $、$China New Airlines (03931.HK) $、$Cloud of everything (02602.HK) $、$Huijing Holdings (09968.HK) $、China Petroleum & Chemical Corp Refining and Chemical Project (02386.HK) $和$Beijing Energy Clean Energy (00579.HK) $Eight other companies may also meet the inclusion criteria, but the ranking of confidence is low. On the contrary, 15 stocks may have been removed from Hong Kong Stock Connect because their market capitalization of less than HK $5 billion does not meet the criteria of the Hang Seng Composite Index.

What needs to be paid attention to in this adjustment is that on December 19, 2022, the China Securities Regulatory Commission and the Hong Kong Securities Regulatory Commission issued a joint announcement to further deepen the interconnection mechanism between the two markets. In addition to the Shanghai-Hong Kong Stock Connect, which can also include Hang Seng Composite small-cap Index stocks with a market capitalization of HK $5 billion or more, major foreign companies listed in Hong Kong can also be included. Therefore, in the adjustment and screening of Hong Kong Stock Connect, foreign companies listed in Hong Kong, such as Oshudan and Samsonite, may also be selected. In addition, Bilibili Inc. 's conversion to a major listing on the Hong Kong Stock Exchange will officially take effect on October 3, 2022, and it can also be included in the inspection scope of Hong Kong Stock Connect stocks. We think there is a high probability this time.

Recent capital trend of Hong Kong stocks: southward short-term profit-taking; overseas capital return, more sustained inflow depends on fundamentals

The southward inflow moderated in the short term. Since the rapid rebound in Hong Kong stocks in November 2022, southbound capital inflows have slowed, and even last week's weekly outflows reached the highest level since August 2021, showing clear signs of profit-taking. Since 2023, southbound capital has accumulated a small outflow of HK $1.96 billion, which is significantly weaker than the inflow of HK $45.2 billion in the same period in 2022 and the large inflow of HK $368.8 billion in the same period in 2021.Flow directionSince the beginning of the year, southbound funds have mainly flowed into China Mobile Limited (HK $4.39 billion), Shangtang W (HK $1.49 billion), CNOOC (HK $1.35 billion), Xiansheng Pharmaceutical Co., Ltd. (HK $900 million) and Byd Company Limited (HK $840 million). However, there were mainly outflows of Tencent (HK $9.71 billion), China Construction Bank Corporation (HK $4.98 billion), Meituan-W (HK $3.22 billion), HKEx (HK $3.13 billion) and Industrial and Commercial Bank of China (HK $1.28 billion).

Looking ahead, we expect southbound funds to slow in the short term in the domestic capital environment of the game between large inflows and stocks in 2022, but the inflows will not be reversed. The domestic monetary policy stance has continued to be loose and gradually intensified since 2022, creating a prerequisite for sustained southward capital inflows. Although it may be difficult to increase macro liquidity significantly on a current basis in 2023, the transfer of household assets from the marginal savings to capital markets will still provide a favorable environment.In contrast, recently, overseas active funds have returned to the Hong Kong stock market after six months, mainly from the Asia-Pacific region.And created the largest weekly inflow since March 2021. Prior to this, the outflow of overseas active funds basically ran through the whole of 2022, especially during March, May and August of 2022. Combined with historical experience, the influx of overseas money is more driven by China's growth and earnings prospects, even as the Fed tightens, such as 2017. At present, the main overseas funds are generally underallocated to China, and if the subsequent domestic fundamentals and corporate profits can continue to be repaired, we expect that overseas funds will continue to return under the current obviously low allocation conditions.

Outlook: the positive window is still there, currently in the "second stage" of the rebound, and the follow-up pace and space depend on the degree of earnings repair.

The MSCI China index has risen nearly 50% since its low at the end of October, while the growth-led Hang Seng Technology Index has risen nearly 60%. This rebound basically confirms our view that the most difficult time for Hong Kong stocks is gradually over and taking a turn for the better. However, recently, under the influence of a large southward capital outflow, renewed waves in Sino-US relations, and the repair of economic activity during the Spring Festival has not exceeded expectations, the market has shown some signs of profit-taking. In response, we tend to think that the current market consolidation is more of a pause in the rebound than a reversal of the trend.

Looking forward, in the case of anticipation that there is a rush, we believe that the market may maintain consolidation in the short term to digest the expectations already taken into account and wait for the arrival of new catalysts, including more positive signs of domestic economic growth repair, more stable growth policies and better inflation news in the United States. After the risk premium repair is over (the first step was completed in November) and the valuation repair is nearing completion (the second step is currently under way), earnings expectations will have a more important impact on the next market rebound path and upside. We believe that the rally in the market is not over yet, and the benchmark situation is more similar to 2019, that is, driven by moderate earnings growth (6%, 10%), the market gradually turns to structural opportunities after a rapid repair.

In the allocation strategy, in addition to benefiting from favorable policies on consumption and real estate, we suggest that investors pay attention to three directions: the Internet and health care that are expected to be repaired by reversals, as well as high-tech hardware and software.

Chart: constituent stocks that may be transferred to Hong Kong Stock Connect

Chart: constituent stocks that may be transferred out of Hong Kong Stock Connect

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