After market close on Friday, August 16, 2024 (Beijing Time), Hang Seng Indexes Company Limited will announce the results of the first half review of the Hang Seng Index Series (review examination cut-off date is June 30, 2024), including the major flagship indexes of Hong Kong stocks such as Hang Seng Index, Hang Seng China Enterprises Index, and Hang Seng Tech Index, as well as the Hang Seng Composite Index which is closely associated with the scope of Hong Kong Stock Connect investment. Due to the large passive capital involved in tracking the flagship indexes (according to statistics from Bloomberg and Wind, the ETF tracking Hang Seng Index, Hang Seng China Enterprises Index and Hang Seng Tech Index is approximately USD 25.76 billion, USD 4.95 billion and USD 15.14 billion respectively), the potential changes in constituent stocks and corresponding capital trend are worth paying close attention to. Based on the publicly available information, we preview the potential adjustments below for investors' reference.
Hang Seng Index adjustment: Innovent Bio and Xpeng are leading candidates to be added to the index.
Candidate for potential adjustments: Based on the Hang Seng Index adjustment methodology and the understanding and verification of non-quantitative adjustment standards through multiple actual adjustments, we estimate the list of top-ranked ones that are likely to become potential candidates for inclusion in the index. Our estimation takes into account market cap ranking, as well as representative and coverage factors of various industries. However, it should be noted that historical experience shows that actual results may deviate significantly from this ranking-based screening. For example, JD Logistics (02618.HK) has ranked highly in several past forecasts, but ultimately has not been included. This may be mainly due to the lack of detailed and quantitative criteria for factors such as industry and listing location representation, and does not exclude consideration of other non-quantitative factors in decision-making.
However, it should be pointed out that several highly ranked candidates in the non-quantitative adjustment standards have also emerged in each review period, and there is still the possibility of them being included in the index. $KUAISHOU-W (01024.HK)$with$JD LOGISTICS (02618.HK)$has ranked highly in several past forecasts, but ultimately has not been included. This may be mainly due to the lack of detailed and quantitative criteria for factors such as industry and listing location representation, and does not exclude consideration of other non-quantitative factors in decision-making.
Hong Kong Stock Connect and Hang Seng Composite Index adjustments: It is expected that 25 companies will be included in Hong Kong Stock Connect, while 33 will be removed.
This review also coincides with the semi-annual index review (the calculation cut-off dates are June 30 and December 31 each year). Moreover, as the Hang Seng Composite Index is the sample space for Hong Kong Stock Connect investment, its changes will directly affect the investable range of Hong Kong Stock Connect, and thus deserves attention.$Hang Seng Composite Index (800701.HK)$Based on the Hang Seng Composite Index adjustment methodology and the additional standards that need to be met for inclusion in Hong Kong Stock Connect (such as the market cap of small cap stocks included in the Hang Seng Composite Index being over HKD 5 billion, excluding stocks subject to risk alert implementation, suspended listing or entering the delisting period; the companies with weighted voting right stocks also need to meet additional conditions such as listed for 6 months, 20 days, market cap, and transaction volume), we estimate that there are 25 stocks that may meet the criteria for inclusion in Hong Kong Stock Connect this time. Conversely, we estimate that there are 33 stocks that may be removed from Hong Kong Stock Connect due to factors such as a market cap of less than HKD 4 billion, market cap coverage ranking below 96%, or suspension of trading.
It should be noted that, according to the financial report released by Xpeng on May 14th of this year, the company expects to complete the transition from secondary to primary listing by the end of August this year. Considering that the company has already met other requirements for inclusion in Hong Kong Stock Connect, such as: 1) it has been listed for more than 6 months and 20 trading days (listed on November 26, 2019); 2) as a company with weighted voting right stocks, its daily market cap has not been less than HKD 20 billion and its transaction volume has not been less than HKD 6 billion on average per day in the 183 days before the examination date. Therefore, if the company successfully completes the transition to primary listing by the end of August 2024, it is expected to catch up with the Hong Kong Stock Connect examination date on September 5th and be included in the round of adjustments around September 9th. However, we would like to remind investors of the risk of not being included if the transition to primary listing cannot be completed.
Schedule: Announcement after market close on August 16, implementation on September 9; corresponding adjustments to Hong Kong Stock Connect constituents.$BABA-SW (09988.HK)$It should be noted that, according to the financial report released by Xpeng on May 14th of this year, the company expects to complete the transition from secondary to primary listing by the end of August this year. Considering that the company has already met other requirements for inclusion in Hong Kong Stock Connect, such as: 1) it has been listed for more than 6 months and 20 trading days (listed on November 26, 2019); 2) as a company with weighted voting right stocks, its daily market cap has not been less than HKD 20 billion and its transaction volume has not been less than HKD 6 billion on average per day in the 183 days before the examination date. Therefore, if the company successfully completes the transition to primary listing by the end of August 2024, it is expected to catch up with the Hong Kong Stock Connect examination date on September 5th and be included in the round of adjustments around September 9th. However, we would like to remind investors of the risk of not being included if the transition to primary listing cannot be completed.
Time frame: Official announcement after market close on August 16, implementation on September 9; corresponding adjustments to Hong Kong Stock Connect constituents.
Time-wise, Hang Seng Indexes Company Limited will announce the results of the Hang Seng Indexes adjustment after market close on Friday, August 16, 2024 (Beijing Time), and the new indexes will be officially implemented on Monday, September 9 of the same year. After the implementation of the index adjustment on September 9, the Shanghai and Shenzhen exchanges will subsequently (specific time depends on the exchange's announcement) adjust the investable range of the Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect based on the newly adjusted indexes.
During this period, similar to the MSCI index adjustment, some active funds may still adopt certain arbitrage operations based on the adjustment results, but passive funds will choose to adjust their portfolios on the last trading day before the adjustment (i.e. September 6) in order to minimize tracking error. Related stocks may experience a "significantly increased volume" situation, especially during the closing period.
Figure 1: ETF fund sizes tracking Hang Seng Index, Hang Seng China Enterprises Index and Hang Seng Tech Index
Chart 2: Hang Seng Composite Index Constituent Stock Adjustment Rules
Chart 3: Screening Process and Rules of Hong Kong Stock Connect
Edited by Jeffrey