Source: Zhongjin Dim Sum
Author: Liu Gang, Zhang Weihan
After the market on May 17, 2024, Hang Seng Indices announced its regular first-quarter index adjustment results (this review ends on March 31, 2024, 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, there are also partial adjustments to the Hang Seng Composite Index, which directly determines the scope of investment in Hong Kong Stock Connect. We comprehensively analyze the impact for investors to refer to.
Index adjustments and impacts: BYD Electronics is included in the Hang Seng Index, Country Garden services are excluded; Zijin Mining is included in Hang Seng state-owned enterprises, and Xinyi Solar is excluded.
► Changes in constituent stocks:$BYD ELECTRONIC (00285.HK)$Included in the Hang Seng Index,$CG SERVICES (06098.HK)$removed;$ZIJIN MINING (02899.HK)$Incorporated into Hang Seng state-owned enterprises,$XINYI SOLAR (00968.HK)$Removed.
1) Hang Seng Index: BYD Electronics will be included in this adjustment, with a weight of 0.22%; Country Garden Services will be excluded, and the weight before exclusion will be 0.10%. After the adjustment, the number of constituent shares remained unchanged at 82.
2) Hang Seng State-owned Enterprises: Zijin Mining will be included in this adjustment, with an included weight of 1.28%; Xinyi Solar Energy will be removed, with a weight of 0.35% before exclusion. After the adjustment, the number of constituent shares remained unchanged at 50.
3) Hang Seng Technology: None were excluded this time, and the constituent stocks remained unchanged at 30.
► Passive capital flow estimation: Focus on BYD Electronics, Zijin Mining and$LI AUTO-W (02015.HK)$Positive effects such as; on Country Garden services, Xinyi Solar Energy,$JD-SW (09618.HK)$etc., negative effects. Based on Bloomberg's summary, the capital size of ETFs tracking the Hang Seng Index is about US$27.65 billion, and the ETFs tracking the state-owned enterprises and Hang Seng Technology Index are about US$5.32 billion and US$16.39 billion respectively. Combining the above components and changes in equity weight, we estimate potential passive capital flows. Further combining the average daily turnover of individual stocks over the past 3 months, it is possible to measure the possible impact of changes in passive capital:
1) Hang Seng Index: The most time required for passive capital inflows was BYD Electronics, which was included this time. It is expected to bring in an inflow of 60.83 million US dollars, and the inflow time is about 2.2 days. Among the capital outflows, the current 0.10% weight of Country Garden Services will result in a passive capital outflow of about 27.65 million US dollars. The outflow period is about 1.4 days.
2) Hang Seng State-owned Enterprises: The most time required for passive capital inflows is the Zijin Mining industry, which was included this time. It is expected to bring in an inflow of 68.06 million US dollars, and the inflow time is about 0.9 days. Of the capital outflows, Xinyi Solar's current weight of 0.35% will bring about 18.61 million US dollars of passive capital outflow. The outflow period is about 0.6 days.
3) Hang Seng Technology: Although the constituent stocks have not been adjusted this time, the weights of some of the targets have been reset. Among them, the ideal car-W, which takes the most time for passive capital to flow in, and$HAIER SMARTHOME (06690.HK)$It is estimated that it will take around 2.7 days and 1.2 days, respectively. Instead, due to JD Group-SW and$XIAOMI-W (01810.HK)$The reset due to exceeding the 8% weight limit (current weight 9.54% and 10.27%) is expected to result in about 1.5 days of passive capital outflows, respectively.
Hong Kong Stock Exchange adjustments: It is expected that Sagitar Juchuang will meet the requirements for inclusion in the Shanghai-Hong Kong Stock Connect; Jitu Express-W may be included in the near future if it meets market capitalization and transaction volume
Since this is a quarterly index adjustment, for the Hang Seng Composite Index, which is systematically adjusted every six months, only stocks that meet the rapid inclusion mechanism will be considered for inclusion. Based on the current Hang Seng Composite Index adjustments in conjunction with the Hong Kong Stock Connect inclusion requirements, we expect$ROBOSENSE (02498.HK)$Or it is within the scope of the Hong Kong Stock Connect. Meanwhile, it was listed on the Hong Kong Stock Exchange on October 27, 2023, and is already a major component of the Hang Seng Composite Index on March 4 this year$J&T EXPRESS-W (01519.HK)$It will also soon meet the additional requirements for 6 months and 20 trading days for companies with the same shares and different rights to be included in the Hong Kong Stock Connect. If the quantitative conditions for market value and total transaction volume are met at that time, it is expected that it will also be included in the Hong Kong Stock Connect investment target in the near future. However, the final target changes and timing should be subject to the information published by the Shanghai Stock Exchange and the Shenzhen Stock Exchange.
Characteristics of the adjusted index: The share of large consumption in the Hang Seng Index has increased, but the share of finance has declined markedly
► Index expansion: The number of constituent stocks of the Hang Seng Index has not been adjusted and remains 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 slower than expected.
► Industry representation: The consulting technology industry's market coverage has increased, but the construction real estate industry has declined. Referring to the Hang Seng Index Company's industry classification (i.e. 7 industry categories), after the current Hang Seng Index adjustment, the coverage of the consulting technology industry increased from 88.7% to 89.5%, while the coverage of the real estate and construction industry declined from 46.9% to 46.1%.
► Industry share: The share of finance and consumption has increased, but the IT industry has declined. After this adjustment, the share of the Hang Seng Index in the market capitalization of the new economy declined slightly from the current 49.9% to 49.4%. At the industry level, the share of the financial and consumer sectors has increased, from the current 32.8% and 13.0% to 33.1% and 13.3%, respectively. However, the share of the IT industry has declined, from the current 30.6% to 29.6%.
Adjusted schedule: officially effective June 11
The above index adjustment results will officially take effect on June 11 (Tuesday). 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, June 7) 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.
Chart 1: After this adjustment, the share of internal finance, consumption and utilities in the Hang Seng Index rose slightly, but the share of IT and real estate construction declined slightly
Chart 2: At the level of industry coverage, the Hang Seng Index's coverage of the IT industry increased slightly, but the coverage of the real estate and construction industry declined
Chart 3: ETF fund size tracking the Hang Seng Index, Hang Seng State-owned Enterprises Index, and Hang Seng Technology Index
Note: Data as of May 17, 2024
Editor/jayden