Source: CICC strategy
After trading on February 24, Hang Seng Index announced the results of a series of reviews of the Hang Seng Index in the fourth quarter of 2022, including major flagship indices of Hong Kong stocks, such as Hang Seng, state-owned enterprises, Hang Seng Technology, and the Hang Seng Composite Index, which is directly related to the investment scope of Hong Kong stocks. All adjustments will take effect on March 13.
Why do the quarterly test results of the Hang Seng Index attract the attention of the market and investors? This is mainly because changes in the constituent stocks of the Hang Seng Index will involve large capital inflows and outflows. At present, there are different types of index funds in the market that track the performance of the Hang Seng Index. Take the funds tracking the Hang Seng Index as an example, investors indirectly invest in 50 constituent stocks of the Hang Seng Index from different industries by investing in these funds. Generally speaking, the performance of the fund will follow the rise and fall of the Hang Seng Index, and the return or loss of investors is roughly the same as the performance of the Hang Seng Index.
As of January 31, the total asset management value of passively tracking Hang Seng Index products is about US $64.5 billion (about RMB 444.5 billion), that is, the results of the Hang Seng quarterly inspection will affect the capital flow of more than 440 billion yuan.
In view of the impact of this Hang Seng series index and Hong Kong Stock Connect adjustment, the research and analysis of CICC's strategy is as follows:
Index adjustment and impact: there is no change in the Hang Seng Index; XPeng Inc.-W and Weibo Corp-SW are included in Hang Seng State-owned Enterprises and Hang Seng Technology respectively
Changes in constituent stocks: the composition of the Hang Seng Index has not been adjusted this time; XPeng Inc. was included in Hang Seng state-owned enterprises, and Weibo Corp was included in Hang Seng Technology.
1) Hang Seng Index: it is not included and excluded this time, and the number remains unchanged at 76.
2) Hang Seng State-owned Enterprises: this adjustment includes XPeng Inc.-W, with a weight of 0.59%, while excluding China Feihe Limited, the weight is 0.39%. The number of constituent shares remains unchanged at 50.
3) Hang Seng Technology: this adjustment includes Weibo Corp-SW with a weight of 0.04%, while excluding Ming Yuan Cloud Group, the weight is 0.35%. The number of constituent shares remains unchanged at 30.
The above inclusion list is somewhat different from the previous preview results of CICC, as stated in the report, mainly because the adjustment result of the Hang Seng series index is not entirely based on the published quantitative criteria, but also depends on the decision of the index adjustment committee, thus making it more difficult to predict purely according to the quantitative criteria.
In addition, the change of the new adjustment standard after the systematic optimization of the Hang Seng Index will also have a certain impact. For example, according to the original plan, the number of constituent stocks of the Hang Seng Index will reach 80 in 2022, but it has not been achieved yet, and the progress is obviously slower than expected.
Potential passive capital flows: pay attention to the positive effects on China Hongqiao, Li Auto Inc.-W, XPeng Inc.-W and Weibo Corp-SW, and the negative effects on HSBC Holdings PLC, China Feihe Limited and Ming Yuan Cloud Group.
Based on the Bloomberg summary, the ETF for tracking the Hang Seng Index is about $24.89 billion, while the ETF for tracking state-owned enterprises and Hang Seng Technology is about $6.19 billion and $12.68 billion, respectively. Combined with the above components and equity weight changes, CICC calculates the potential passive capital flows. Further combined with the average daily turnover of individual stocks over the past three months, the possible impact of changes in passive funds can be estimated:
1) Hang Seng Index: China Hongqiao and CITIC Limited, who take the most time for passive capital inflows, are expected to take about half a day. On the contrary, the reset of HSBC Holdings PLC, which exceeds the weight limit of 8 per cent (the current weight is 9.38 per cent), is expected to lead to passive outflows of about 2.6 days. At the same time, CNOOC and Tencent also have passive capital outflows due to weight reduction, but it will probably take less than 0.4 days.
2) Hang Seng State-owned Enterprises: due to the new index processing method for dual major listed companies announced on December 9, 2022[2]At the beginning of this time, for companies that have passed the investment index turnover test, the number of shares in circulation is calculated based on the company's equity rather than Hong Kong equity, so the Li Auto Inc.-W weight that passed the turnover test rose to 1.56% from 0.64% before. it is expected to bring passive capital inflows of US $57 million, which will take the longest time, estimated to be about 0.55 days.
In addition, the newly included XPeng Inc.-W is also expected to receive a capital inflow of US $36.5 million, which takes about 0.4 days. In the capital outflow, due to the exclusion of China Feihe Limited, the current weight of 0.39% will bring a passive capital outflow of US $24.15 million, which is expected to take about 1.1 days.
3)Hang Seng Technology:As mentioned earlier, as the new index processing method is implemented, the inclusion weight of Li Auto Inc.-W in the Hang Seng Technology Index has increased from 2.94% to 6.26%, which is expected to bring an inflow of passive capital of $420 million, which will take about 4.1 days. The new Weibo Corp-SW is also expected to take about 3.9days. In the outflow of funds, due to the exclusion of Ming Yuan Cloud Group, the existing weight of 0.35% will bring a passive capital outflow of US $44.4 million, which is expected to take about 2.9 days.
The characteristics of the adjusted index: the Hang Seng Index maintained 76, the proportion of the consumer sector increased, and the new economy of state-owned enterprises accounted for 63%.
Composition adjustment: the number of components of the Hang Seng Index remains unchanged. The Hang Seng Index has not made any adjustment at the component level and remains at 76. However, in the consultation results released in March 2021, Hang Seng Index companies mentioned that the number of Hang Seng Index stocks would increase to 80 by mid-2022, eventually fixed at 100. However, at present, the pace of capacity expansion is obviously slower than planned.
Industry distribution: the share of market capitalization of the Hang Seng Index large consumer sector has increased. With reference to the industry classification of Hang Seng Index companies (that is, seven industry categories), although the adjustment of the Hang Seng Index does not involve changes in composition, after weight adjustment, the proportion of non-essential and essential consumption weight has increased from 13.1% to 13.7%, with an increase of more obvious. However, the weight share of consulting technology and financial industry declined rapidly, both by 6 percentage points.
New economy share: both Hang Seng Index and Hang Seng State-owned Enterprises New economy share rose slightly. After this adjustment, the share of the new economy market capitalization of the Hang Seng Index reached 47.2%, up 0.15 percentage points from the current 47.05%. The proportion of the new economy in the state-owned enterprise index reached 63.2%, which continued to increase from 62.5% before the adjustment.
Adjustment of Hong Kong Stock Connect: 30 companies are expected to be included in the Hong Kong Stock Connect, and 20 may be removed
This also coincides with the semi-annual review of the Hang Seng Composite Index (adjusted twice a year, with the deadlines of June and December, respectively), which will become the main basis for the Shanghai and Shenzhen exchanges to determine the investment scope of the Hong Kong Stock Connect. According to the adjustment situation and the inclusion requirements of the Hong Kong Stock Exchange, CICC analyzes the possible adjustments of the Hong Kong Stock Exchange as follows, but the final target changes should be subject to the information released by the Shanghai Stock Exchange and the Shenzhen Stock Exchange.
30 stocks may be eligible for inclusion in the Hong Kong Stock Exchange:
1) newly included in the Hang Seng Composite Index. Such as Standard Chartered PLC, Taikoo B, brilliance Automobile, Juzi Bio, Coal Australia, Hongjiu Fruit, Star Chinese, MINISO Group, Weilong, Sipai Health, BOE Jingdian, Siludi Pharmaceuticals, Shangao New Energy, Gao Wei Electronics, New Special Energy, Shangmei Co., Micro-Innovation brain Science, Xintai Medical, Zhihu Inc.-W, High Vision Medical, Longguang Group, Kingsoft Cloud Holdings, Feitian Yunzhong, Emi Vaccine, Karma Medical, Boan Biology-B, Lemeng Film and Television, Jianshi Technology-B and Tinker Bell Health.
2) turn into dual major listed companies. 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.
In addition, on December 19, 2022, the China Securities Regulatory Commission and the Hong Kong Securities Regulatory Commission issued a joint announcement to further deepen the trading connectivity mechanism between the two markets, and the shares of major foreign companies listed in Hong Kong can also be included. CICC sorted out that foreign companies listed on Hong Kong stocks, including PRADA S.p.A., United, ou Shudan, Samsonite and Jin Jie Holdings, may be eligible. However, it has not yet come into effect explicitly, and if it does not take effect before the adjustment, the adjustment may not be included in these companies.
20 stocks may be removed from the Hong Kong Stock Connect:
Including ao you, Zhengrong Real Estate, Yun Music, Tianyu Real Estate, Sun Hung Kai, Chow Sang Sang, Ka Wah International, Shun Tak Group, everyone Le Group, IGG, time China Holdings, China Everbright Green, Baoxin Financial, Yuzhou Group, New higher Education Group, GOGOX, Xiangsheng Holdings Group, Rongxin China, Yongtai Biological-B and Deqi Pharmaceutical-B.
In addition, on January 19 this year, the HKEx also announced an update to expand the range of eligible stocks for interconnection, which said that in order to reduce changes in eligible stocks, when the average market capitalization of Hong Kong stocks at the end of the 12 months before the regular inspection of the index is less than HK $4 billion (instead of HK $5 billion), it has become a general mark for selling Hong Kong stocks, but the exact effective time has not yet been announced. If it does not take effect before the adjustment, some targets that are reclassified as small stocks and have a market capitalization of less than HK $5 billion may also be transferred out of Shenzhen Stock Exchange this time.
Adjustment schedule: officially effective on March 13
The above index adjustment results will take effect on Monday, March 13. 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 they take effect (that is, March 10) in order to minimize the tracking error. It is expected that at that time, the trading of the relevant stocks may be much larger than the usual "abnormal volume" situation, especially in late trading.
Edit / Corrine