Source: Zhongjin Dim Sum
Authors: Liu Gang, Zhang Weihan

Index adjustments and impacts: The Hang Seng Index remained unchanged at 80; Sinopharm Holdings was incorporated and Country Garden was removed

► Changes in constituent stocks: Hang Seng Index was included in Sinopharm Holdings, excluding Country Garden; Ctrip and Oriental Selection were included in Hang Seng State-owned Enterprises and Hang Seng Technology, respectively.

1) Hang Seng Index:This adjustment will include Sinopharm Holdings, with an inclusion weight of 0.26%; Country Garden was excluded, and the weight before the exclusion was 0.09%. After the adjustment, the number of constituent stocks remained unchanged at 80.

2) Hang Seng State-owned Enterprises:This adjustment was included in Ctrip-S, and the inclusion weight was 0.61%. At the same time, excluding the Country Garden service, the weight before exclusion was 0.22%. The number of constituent stocks remained unchanged at 50.

3) Hang Seng Technology:This adjustment included the Eastern Selection, and the inclusion weight was 0.87%. At the same time, excluding Ruisheng Technology, the weight before exclusion was 0.59%. The number of constituent stocks remained unchanged at 30.

► Passive capital flow estimation: Focus on the positive impact of Sinopharm Holdings, Ctrip S and Oriental Selection; the negative impact on Country Garden, Country Garden Services, and Ruisheng Technology.Based on Bloomberg's summary, the funding scale of ETFs tracking the Hang Seng Index is about US$27.54 billion, while the size of ETFs tracking state-owned enterprises and the Hang Seng Technology Index is about US$5.67 billion and US$14.27 billion, respectively. Combining the above components and share weight changes, and the average daily turnover over the past 3 months, we estimate the possible impact of changes in passive capital:

1) Hang Seng Index:Sinopharm Holdings, which takes the most time for passive capital to flow in, is expected to take 4.3 days. Instead, Country Garden is expected to generate around 0.4 days of passive capital outflows. Furthermore, since Tencent Holdings, HSBC Holdings, and Alibaba-SW are currently being reset due to exceeding the 8% limit, it is also expected to bring about 0.1-0.6 days of passive capital outflow.

2) Hang Seng State-owned Enterprises:The largest amount of time required for passive capital inflows is Ctrip Group-S, which was included this time. It is expected to bring in an inflow of 34.6 million US dollars, which is about 0.6 days. Of the capital outflows, Country Garden Service's current weight of 0.22% will result in an outflow of 12.47 million US dollars in passive capital, which is about 0.2 days.

3) Hang Seng Technology:The most time required for passive capital to flow in is the Oriental Selection to be included this time. It is expected to bring in an inflow of 124 million US dollars, which is about 2.4 days. Of the capital outflows, Ruisheng Technology's current weight of 0.59% will bring in an outflow of 84.2 million US dollars of passive capital, which is about 10 days. Furthermore, since the weight limit of over 8% of Ideal Auto has been reset, it is expected to bring about 2 days of passive capital outflow. The weibo-SW weight will also be lowered from the current 0.03% to 0.01%, and it is estimated that the required passive capital outflow time will be about 4 days.

Characteristics of the adjusted index: the constant index remained unchanged, and the market coverage of the healthcare industry increased

► Index expansion: After this adjustment, the 80 constituent stocks of the Hang Seng Index remained unchanged.According to the consultation results released by the Hang Seng Index Company in March 2021 [1], the number of constituent stocks of the Hang Seng Index will increase to 80 by mid-2022, and will eventually be fixed at 100. Currently, the overall progress is clearly lagging behind, and only the phased target has been achieved.

► Industry representation: The market coverage of the healthcare industry has increased.Referring to the Hang Seng Index company's industry classification (that is, the 7 industry categories), after the Hang Seng Index adjustment, the healthcare industry's coverage of the main board of the Hong Kong stock market increased from 30.9% to 32.5%. However, due to the exclusion of Country Garden, the Hang Seng Index's coverage of the real estate and construction industry declined, falling slightly from 48.3% previously to 47.6%. As the number of constituent stocks continues to expand, we expect the share of the new economy to increase further.

► Industry share: The share of big consumption and the financial sector has increased.After this adjustment, the share of the new economy in the Hang Seng Index was about 49.1%, a slight decrease of 0.5ppt from the current 49.6%. Among them, the financial sector and the large consumer industry increased 0.2 and 0.4 ppt respectively. The share of the new economy in the state-owned enterprise index was about 64.9%, compared to 65.6% before the adjustment. The share of finance and information technology increased significantly, while the share of optional consumption and real estate declined the highest.

Adjustments to the Hong Kong Stock Exchange Standard: 22 companies are expected to meet the conditions for inclusion in the Shanghai-Hong Kong Stock Connect; 18 may be removed

This time also coincides with the semi-annual index review of the Hang Seng Composite Index (adjusted twice a year, with the end of June and December, respectively). This will also be the main basis for the Shanghai and Shenzhen Exchange to determine the scope of investment in Hong Kong Stock Connect. Based on the adjustment situation and the Hong Kong Stock Connect inclusion requirements, we analyze the possible adjustments to the Hong Kong Stock Exchange as follows, but the final changes in the target should be based on information published by the Shanghai Stock Exchange and the Shenzhen Stock Exchange.

► 22 stocks may be eligible for inclusion in the Hong Kong Stock Connect:These include Marco Digital Technology, Pharmacist Group, Zhenjiu Li Du, Shangri-La (Asia), Beijing Financial International, Extraordinary Leading, Adicon Holdings, Hongxin Construction and Development, Friendship League International Education Leasing, Tehai International, Jiufang Wealth, COSMOPOL INT'L, Codi-B, CGN Mining, Baiguoyuan Group, Sunac China, Dase Co., Ltd., Daze Group, Laikai Pharmaceutical-B, Beisen Holdings, Yi Dianyun, and Mace Health.

► 18 stocks may be removed from the scope of Hong Kong Stock Connect:These include ViaBio, Yuhua Education, Excellent Business Services, Zulong Entertainment, Jianye New Life, Xinli International, Hong Kong Aerospace Technology, Baolong Commercial, Hutai Textile, Clover Bio-B, Zhongjun Group Holdings, Hejing Youhuo, Zhongliang Holdings, Enjoy Group, Dexin China, Zhengshang Industrial, Hongyang Real Estate and Hong Kong Dragon China Real Estate.

Schedule adjustments: Effective September 4

The above index adjustment results will officially take effect on September 4 (Monday). During this period, it is still not ruled out that some active funds will adopt certain arbitrage operations based on the results of the adjustments announced, but in order to minimize tracking errors, passive funds will choose to adjust their positions on the trading day before entry into force (that is, September 1).We anticipate that related stock transactions at that time may experience an “abnormal volume” situation that is far greater than usual, especially at the end of the session.

Editor/Somer