Source: Zhongjin Dim Sum
Authors: Liu Gang, Zhang Weihan
Original title: “CICC: Analysis of the Impact of Hang Seng Index and Hong Kong Stock Connect Adjustments (2024-2)”
After the market on February 16, 2024, Hang Seng Indices announced the results of its regular semi-annual index adjustments (the review ends on December 31, 2023, and is generally announced within 8 weeks after the inspection date). The scope of this adjustment covers the main flagship indices of Hong Kong stocks, such as the Hang Seng, the State-owned Enterprises Index, and the Hang Seng Technology Index; in addition, the Hang Seng Composite Index, which directly determines the scope of investment in Hong Kong Stock Connect, has also been adjusted.
Index adjustments and impact: The Hang Seng Index remained unchanged at 82; China Unicom and Tongcheng Travel were included in Hang Seng State-owned Enterprises and Hang Seng Technology respectively
Changes in constituent stocks: China Unicom is included as a Hang Seng state-owned enterprise, and Tongcheng Travel is included in Hang Seng Technology.
1) Hang Seng Index: There were no inclusions or exclusions at this time, and the constituent stocks remained unchanged at 82.
2) Hang Seng State-owned Enterprises: This adjustment included 1 stock of China Unicom, with an included weight of 0.52%; Zhongsheng Holdings was excluded, with a weight of 0.18% before exclusion. After the adjustment, the number of constituent shares remained unchanged at 50.
3) Hang Seng Technology: This adjustment includes same-trip travel, with an inclusion weight of 1.24%. At the same time, excluding the Universal Data - SW, the weight before exclusion is 0.13%. The number of constituent stocks remained unchanged at 30.
Passive capital flow estimation: Focus on the positive impact on Ctrip Group-S, China Unicom, and Tongcheng Travel; the negative impact on Zhongsheng Holdings and WDS. Based on Bloomberg's summary, the capital size of ETFs tracking the Hang Seng Index is about US$24.46 billion, and the ETFs tracking the state-owned enterprises and Hang Seng Technology Index are about US$5.14 billion and US$15.50 billion respectively. Combining the above components and changes in share weight, and further combining the average daily turnover of individual stocks over the past 3 months, it is possible to measure the possible impact of changes in passive capital:
1) Hang Seng Index: Although the constituent stocks have not been adjusted this time, the weights of some of the targets have been reset. Among them, Ctrip Group-S and ICBC, which take the most time to inflow passive capital, are expected to take more than 0.5 days, respectively. Conversely, as HSBC Holdings and Alibaba-SW were reset by exceeding the 8% weight limit (current weights of 8.92% and 8.33%), they are expected to result in passive capital outflows of around 2.0 and 0.2 days, respectively.
2) Hang Seng state-owned enterprises: The most time required for passive capital inflows was China Unicom, which was included this time. It is expected to bring in an inflow of 26.73 million US dollars, and the inflow time is about 1.5 days. Among the capital outflows, Zhongsheng Holdings' current weight of 0.18% will bring about a passive capital outflow of about 9.25 million US dollars, which is about 1.1 days.
3) Hang Seng Technology: The most time required for passive capital inflows was for this included Tongcheng trip, which is expected to bring in US$190 million in inflows, or about 21.4 days. Among the capital outflows, GDS currently has 0.13% of the weight, which will result in a passive capital outflow of 2015 million US dollars, which is about 3.5 days.
Characteristics of the adjusted index: the share of large consumption in the Hang Seng Index has increased
Index expansion: The constituent stocks of the Hang Seng Index have not been adjusted and remain unchanged at 82. According to the consultation results released by the Hang Seng Index Company in March 2021 [1], the Hang Seng Index constituent stocks will increase to 80 by mid-2022, and will eventually be fixed at 100. Currently, it is still expanding towards this target, but the overall progress is significantly slower than expected.
Industry share: The share of large consumption has increased. Since the Hang Seng Index has not adjusted its constituent stocks this time, there has been no change in terms of industry representation and market coverage. However, due to changes in the weight of the target, the share of the Hang Seng Index in the new economy market capitalization rose slightly from the current 46.7% to 46.9% after this adjustment. At the industry level, the current share of the financial sector fell to 34.1%, and the share of the large consumer sector rose from 13.8% to 14.0%.
Hong Kong Stock Exchange adjustment: 22 companies are expected to meet the requirements for inclusion in the Shanghai-Hong Kong Stock Connect; 27 may be removed
This time also coincides with the Hang Seng Composite Index semi-annual index review (adjusted twice a year, ending at the end of June and December, respectively). This will also be the main basis for the Shanghai and Shenzhen Stock 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 the information published by the Shanghai Stock Exchange and the Shenzhen Stock Exchange.
Twenty-two stocks may be eligible for inclusion in Hong Kong Stock Connect: Shankao Holdings, Zhonghuan New Energy, Zhongxu Future, Pharmaceutical Union, Boquan, Youbao Online, Columbotai Bio-B, Yuefeng Environmental Protection, Premium Choice, Ferretti, Canggang Railway, Shenwei Pharmaceutical, Superstar Legends, China Spring, Junshengtai Pharmaceutical-B, October Rice Field, Fourth Model, Evergrande Property, Ruipu Lanjun, Yiming Angko-B, Xuhui Holding Group, and Shimao Group.
It should be noted that Ferretti is a foreign company. Foreign companies, including L'Occitane and Samsonite, have successfully entered the Hong Kong Stock Connect transaction after expanding the scope of interconnection standards to include foreign companies in March 2023, so we think Ferretti will also have an opportunity to enter Hong Kong Stock Connect in March of this year.
27 stocks may be removed from Hong Kong Stock Connect: including Shangri-La (Asia), Weilong Mei, China Huarong, China Ship Leasing, Hongxin Construction and Development, Hong Kong China Travel, Dashi, Daxin Bank Group, Changjiang Life Technology, Hutchengao New Energy, Yeju Healthcare, Shimao Services, Qiming Medical-B, Feitian Yundong, Xinchengyue Services, China High Speed Transmission, Gax-B, Conch Environmental Protection, Gome Retail, Cornerstone Pharmaceutical-B, Hong Kong Technology Exploration Fu Group, Tengsheng Pharmaceutical-B, Yonghe Medical, Kaituo Pharmaceutical-B, and Dingfeng Group Auto.
Adjusted schedule: officially effective March 4
The index adjustment results will officially take effect on March 4 (Monday). During this period, it is still not ruled out that some active funds will take certain arbitrage operations based on the published results of the adjustments, but passive funds will choose to adjust their positions on the trading day before the entry into force (that is, March 1) in order to minimize tracking errors. We expect that the relevant stock transactions may experience a “abnormal volume” situation far greater than usual at that time, especially at the end of the session.
[1] https://www.hsi.com.hk/static/uploads/contents/zh_cn/news/consultations/20210301T000000.pdf
Editor/Somer