Xinxin, Feihe, Poly property and elegant living Services are all on the list; BABA's inclusion is just around the corner.

The list of Newport Stock Connect is initially determined, and it is expected that 20 should be included.

Hang Seng Index announced the results of the semi-annual review of the constituent stocks of the Hang Seng Composite Index (HSCI) after the close of trading on February 21. The results of both the Hang Seng Composite Index and the Hong Kong Stock Exchange will take effect on March 9. Through the results of this review of the Hang Seng Composite Index, we can initially lock in and out of the list of transfers from Hong Kong Stock Connect. We expect that 20 targets should be included in this Hong Kong Stock Connect list:

1）11只It also includes the Hang Seng Hong Kong Stock Exchange Index and the Hang Seng Composite Index: China Feihe Limited (6186.HK), Topsports International Holdings Limited (6110.HK), Sony Holdings Group (2103.HK), Baoxin Finance (1282.HK), elegant living Services (3319.HK), 1268.HK, 0302.HK, 1873.HK, 6069.HK, 0826.HK and 1789.HK.

2）9只Included in the Hang Seng Composite Index and the 12-month average current market capitalization is more than HK $5 billion: JS Global Lifestyle Company Limited (1691.HK), Vinda International (3331.HK), Nine Hing Holdings (1836.HK), Shougang International (0697.HK), Zhou Sang Sang (0116.HK), Heart Company (2400.HK), four Seas International (0120.HK), Yingpu Precision (1286.HK) and Poly Properties (6049.HK).

Compared with our forecast report on January 5, 6069.HK was just transferred from the Hong Kong gem to the main board in October 1919, so we missed the forecast.

18 are expected to be pulled from the list, including the Hang Seng Composite Index and a market capitalization of less than HK $5 billion.

In terms of transfer, we expect that 18 targets may be transferred to this Hong Kong Stock Connect list:

1）8只Pull up the Hang Seng Composite Index: broad Pharmaceutical (0512.HK), China car Rental (0699.HK), Talent World recruitment (6100.HK), Jingyuan International (2232.HK), Jiangxi Bank (1916.HK), Macau Lijun (1680.HK), Television broadcast (0511.HK) and China Natural Gas (0931.HK).

2）10只The average market capitalization of 12 months in 2019 is below the market capitalization threshold of 5 billion Hong Kong shares: Tianjin Port Development (3382.HK), Giordano International (0709.HK), Tongda Group (0698.HK), CITIC Resources (1205.HK), 1811.HK, 51 Credit Card (2051.HK), Huifu World (1806.HK), Landing International (0582.HK), Kangchen Pharmaceutical (1681.HK) and Huicong Group (2280.HK).

Hong Kong Stock Connect is still the main investment channel for southward capital. BABA's entry into Hong Kong Stock Connect should be the trend of the times.

We have always stressed that the strengthening of southward financial strength will continue to support some leading enterprises and popular sectors in the mainland. the previous report recommended that we pay attention to the consumer sector, property management plate, game stocks and so on. Among the 20 companies we forecast to be included in this Hong Kong Stock Connect list, Aikang Medical, Xinxin Company, Poly property, Vida International, Ya Life Services, China Feihe Limited and JS Global Lifestyle Company Limited also recorded leading increases.

As to whether BABA can be included in the Hong Kong Stock Connect in the future, we maintain the view of our report when BABA was in the Hong Kong IPO at the end of November last year. In the most optimistic case, BABA may be included in the Hong Kong Stock Connect six months after the IPO, that is, around June 2020. This is simply based on BABA's inclusion rules of "different rights of the same share", that is, similar to the situation of Meituan and XIAOMI. However, in view of the fact that BABA is also a "secondary listing", the inclusion details of such stocks are not explicitly stipulated in the rules for the inclusion of such stocks. We think that there is still a need for guidance from mainland regulators, so there may be certain variables. However, we believe that the demonstration effect of BABA since its listing is obvious. Facing the "local market" and mainland funds that are more familiar with the company's business, entering the Hong Kong Stock Exchange is also the trend of the times and is just around the corner.

Recently, the market was affected by the epidemic. The Hong Kong government announced the subsidy and assistance policy for the epidemic on the 14th, handing out no less than 25 billion Hong Kong dollars, involving a total of 21 projects. We believe that this may inject a shot in the arm into the follow-up development of Hong Kong stocks. During the 2003 epidemic, the Hang Seng Index fell as much as nearly 15%. On April 23 of that year, the Hong Kong government announced eight rescue measures with a total amount of HK $11.8 billion. With positive policies and the peak of the epidemic, the Hang Seng Index has bottomed out and rebounded by 50% since April 25, 2003. Our previous report on 29 January indicated that the outbreak may have reached an inflection point in mid-February. The southward increase of capital holdings will deepen the portrayal of "A-share transformation of Hong Kong stocks". With the assistance measures of the Hong Kong government, it should further repair the emotional side.

Risk tips: domestic economic downturn, increased overseas risks, and so on.

1. The relationship between the Hang Seng Composite Index and Hong Kong Stock Connect:Ordinary stocks with an average market capitalization of more than HK $5 billion in the Hang Seng Composite Index can be included in the Hong Kong Stock Connect.

At present, the adjustment rules of the Hong Kong Stock Exchange are as follows:

(1) most Hang Seng Composite large Index constituent stocks

(2) most Hang Seng Composite medium Index constituent stocks

(3) the constituent stocks of the Hang Seng Composite small share Index, and the constituent stocks are adjusted regularly. The average market value of Hong Kong stocks in circulation in the 12 months before the deadline is not less than HK $5 billion. If the listing time is less than 12 months, the market value is calculated according to the actual listing time.

(4) H shares of A + H shares listed on the Stock Exchange. In our past reports on the selection of Hong Kong Stock Connect, we have repeatedly stressed that as the Hong Kong Stock Connect adjustment is based on the inclusion criteria of the Hang Seng Composite Index (HSCI), that is:The Hang Seng Composite Index is adjusted first, and the Hong Kong stock market changes later.

Based on the above principles, the Hong Kong Stock Exchange adjustment rules can be interpreted as ordinary stocks in the Hang Seng Composite Index with an average market capitalization of more than HK $5 billion over a 12-month period. According to the current regulations, REITs, foreign companies (including gold, PRADA S.p.A., United, etc.) and bound securities already included in the Hang Seng Composite Index cannot be included in the Hong Kong Stock Connect. With the revision of the measures for the implementation of the Hong Kong Stock Connect business by the Shanghai Stock Exchange and the Shenzhen Stock Exchange on October 18, 1919, companies with different rights in the same shares represented by XIAOMI and Meituan can be included in the Hong Kong Stock Connect, which will come into effect on October 28th.

BABA, as we discussed in our previous report, was included in the Hang Seng Composite Index on November 27, 19 because it met the requirements of the rapid inclusion rules of the Hang Seng Composite Index, which came into effect on December 9, 1919. Based on this premise, we believe that, in the most optimistic scenario, BABA may be included in the Hong Kong Stock Connect about six months after its listing. However, due to the particularities of BABA's "same shares with different rights", "secondary listing" and "convertibility of US and Hong Kong stocks", it is necessary to wait for the guidance of the mainland exchanges and the Hong Kong Stock Exchange to include the specific rules of the relevant indices and Hong Kong stock exchanges in the later stage.

In addition, it is worth noting that there are some situations that cannot be included in the Hong Kong Stock Exchange:

(1) A + H shares in the enterprises of Shanghai Stock Exchange and Shenzhen Stock Exchange, A-share enterprises are given risk warning, suspended listing or delisting period.

(2) in Hong Kong Exchanges and Clearing, shares traded on a non-Hong Kong dollar basis

(3) stocks under other special circumstances as prescribed by the exchange.

1.1. The Hang Seng Composite Index has a "general inspection" every six months, in line with the rapid access system.

Hang Seng conducts regular semi-annual reviews of the Hang Seng Composite Index and the large, medium, small and medium-sized Indices. The deadline for the review is the end of June and the end of December each year. In view of the fact that the evaluation period (from January 1, 19 to December 31, 19) has expired.

The review list is generally completed within eight weeks after the closing date and can be traded under the Hong Kong Stock Connect system on the first trading day after the first Friday in March / September. For this adjustment, the official review list of the Hang Seng Composite Index will be announced on February 21, 2020 and will come into effect on March 9, and the corresponding Hong Kong Stock Connect list will also take effect on March 9.

In addition to the semi-annual inspection, the Hang Seng Composite Index also gives two quick access systems for large listed companies:

1）Quarterly fast accessIf the securities are listed in the first or third quarter of each year and meet the market capitalization conditions for inclusion in the Hang Seng large Index and the Hang Seng medium Index (for specific market capitalization requirements, please see 1.2.2), the securities will be included in the Hang Seng Composite Index on the first Friday of June or December as a regular index adjustment date and will take effect on the second trading day. For example, 1896.HK was officially transferred to the Hang Seng Composite Index and Hong Kong Stock Connect on Monday, June 17, 2019 because of its listing on February 8, 2019 and its market capitalization meets the requirements of large and medium-sized stocks.

2）Very fast accessIf the total market capitalization of newly listed securities after the close of trading on the first trading day ranks in the top 10% of the existing constituent stocks of the Hang Seng Composite Index (in terms of the number of constituent stocks), the securities will be included in the Hang Seng Composite Index and its sub-index during regular reviews. This rapid access is usually performed after the close of trading on the 10th trading day after the IPO. For example, Postal Savings Bank of China (1658.HK) was listed on September 28th, with a market capitalization of HK $330 billion and meeting the market capitalization requirements. It was included in the Hang Seng Composite Index and the large-cap Stock Index, and was transferred to both the Hang Seng Composite Index and the Hong Kong Stock Connect on October 13, 16. The most recent example can be referred to Budweiser Brewing Company APAC Limited (1876.HK), which was listed on September 30, 1919, meeting the market capitalization requirements and being transferred to both the Hang Seng Composite Index and the Hong Kong Stock Connect on October 16, 1919. On the other hand, BABA was included in the Hang Seng Composite Index on December 9, 1919 because the Hong Kong shares were fully convertible with the US stock ADS, and some of the shares registered in Hong Kong after conversion reached a market value of HK $917 billion, which also met the market value requirements.

1.2. Three major standards of the Hang Seng Composite Index:

1) Stock selection criteria

2) Market capitalization standard

3) liquidity standard

Among the three major criteria of the Hang Seng Composite Index, the market capitalization and liquidity criteria are mainly based on a specific range of stock selection, while the specific range of stock selection is not all Hong Kong stocks, but needs to eliminate some stocks that do not meet the criteria. Therefore, the change in the scope of stock selection will also affect the screening criteria of market capitalization and liquidity to a certain extent.

1.2.1. Stock selection criteria:5 guidelines for general election stocks

At present, there are five general election stock criteria for the Hang Seng Composite Index:

1) ordinary stocks listed on the main board

2) REITs listed on the motherboard

3) Foreign companies listed first on the motherboard

4) bound securities listed on the motherboard (- SS)

5) the main board listed on the same shares with different rights of the Greater China Company (- W).

In May 2018, Hang Seng Index announced that the first listed foreign companies, contractual securities and companies with different rights in Hong Kong would be included in the category of stock selection of the Hang Seng Composite Index. After the implementation of 18Q3, it will be included in companies such as United, PRADA S.p.A., HK Electric Investments and HK Electric Investments-SS, XIAOMI and Meituan. At present, the mainland exchanges have only approved companies with different rights structures of the same shares (Meituan, XIAOMI) to be included in the Hong Kong Stock Connect. Foreign companies listed in Hong Kong, bound securities and REITs, which are listed in the Hang Seng Index, have not yet been included in the Hong Kong Stock Connect. Therefore, at present, only ordinary stocks listed on the main board can be selected in the Hang Seng Composite Index.Foreign companies such as Golden World Holdings, PRADA S.p.A. and United are not allowed to enter Hong Kong Stock Connect.

In addition, companies that do not meet the above requirements will not be included in the specific stock selection scope of the Hang Seng Composite Index for the time being, including:

1) non-profit pharmaceutical companies listed on the motherboard (- B), such as Golly Pharmaceutical-B (1672.HK), etc.

2) companies with high concentration of equity (the specific list can be found on the list of highly concentrated shares published by the Securities and Futures Commission of Hong Kong)

3) suspend the trading of the company within the audit date

4) other companies that do not meet the stock selection requirements.

Foreign companies mainly refer to companies with their place of registration and their main place of business outside the Greater China region. the factors to determine whether a company's business is focused on Greater China include:

1) where the company is incorporated

2) History of the company

3) where is the headquarters of the company

4) the location of the central management and control of the company

5) the main business operations and assets of the company

6) the nationality or country of residence of the principal management personnel and controlling shareholders of the company.

For example, 3918.HK, a foreign company listed on the main board because of its headquarters and main business in Cambodia, was included in the Hang Seng Composite Index in October 2018, but because foreign companies were unable to enter the Hong Kong Stock Exchange.

In contrast, 1383.HK, which is headquartered in Hong Kong and owns travel agencies in Macau and property assets on the mainland, is a Greater China company and is currently a successful bidder for the Hang Seng Composite Index and the Hong Kong Stock Exchange.

In addition, the length of listing of new shares does not matter. As long as companies listed and meeting the standards during the study period can conduct a review, take the adjustment in September 19 as an example, including Hansoh Pharmaceutical Group (3692.HK, listed on June 12, 2019), China Oriental Education (667.HK, listed on June 12, 2019), Jinxin Reproduction (1951.HK, listed on June 25, 2019), China Tobacco Hong Kong (6055.HK, listed on June 12, 2019), Haitong Hengxin (1905.HK). (listed on June 3, 2019) and China Shipping Leasing (3877.HK, listed on June 17, 2019), although they were not listed until June 19, they were included in the Hang Seng Composite Index and Hong Kong Stock Connect on September 9, 2019, due to their market capitalization and liquidity requirements.

1.2.2. Market capitalization criteria:The market capitalization threshold of the Hang Seng Composite Index is higher than the HK $5 billion threshold of Hong Kong Stock Connect.

According to the logic that the Hang Seng Composite Index adjusts first and Hong Kong stocks pass through and then change, the Hong Kong Stock Exchange transfer rules can be interpreted as ordinary stocks with an average market capitalization of more than HK $5 billion over a 12-month period, but must be in the Hang Seng Composite Index. In other words, although the market capitalization threshold of Hong Kong Stock Exchange is HK $5 billion, in order to be included in the Hang Seng Composite Index, the market capitalization threshold of the Hang Seng Composite Index needs to be met.

We calculate that the 12-month average tradable market capitalization threshold for this transfer to the Hang Seng Composite Index (that is, the first 94 per cent of the market capitalization of a specific range of stocks) is about HK $6.2 billion, which is higher than the Hong Kong Stock Connect standard of HK $5 billion.

After selecting the companies that meet the stock selection criteria, they need to meet the 12-month average market capitalization criteria, namely:If the 12-month average tradable market value of the Hang Seng Composite Index is less than the top 96% of the sum of the 12-month average tradable market value of a given range of stocks, the Hang Seng Composite Index will be excluded.If it is not the target of the Hang Seng Composite Index, it will be included in the Hang Seng Composite Index if the 12-month average market capitalization is higher than the top 94 per cent of the sum of the 12-month average market capitalization of a given range of stocks.

The 12-month average market value in circulation is calculated as the sum of the market value in circulation at the end of each month / 12. If the listing time of a target is less than 12 months, the average current market value at the end of each month since listing is calculated. We estimate that the 12-month average tradable market capitalization threshold for this transfer to the Hang Seng Composite Index (that is, the first 94 per cent of the market capitalization of a specific stock selection range) is about HK $6.2 billion, while excluding the 12-month average tradable market capitalization threshold of the Hang Seng Composite Index (that is, 96 per cent of the market capitalization of a specific stock selection range) is about HK $3.75 billion.

1.2.3. Liquidity criteria:Meet the volume circulation ratio of 0.05% at least 10 months out of 12 months

In addition to the market capitalization criteria, stocks within a reasonable range need to meet the liquidity ratio criteria before they can be included in the Hang Seng Composite Index. In turn, companies that are already in the Hang Seng Composite Index will be excluded if they do not meet the liquidity ratio.

The formula for calculating the volume circulation ratio is as follows:Median daily turnover per month / adjusted free-floating shares at the end of the month

The specific requirements are as followsFor companies that have been on the market for more than 12 months:

1) the volume circulation ratio must reach the minimum requirement of 0.05% in at least 10 of the past 12 months.

2) the volume circulation ratio must reach the minimum requirement of 0.05% in at least 5 of the past 6 months.

For example, if the time range of an adjustment is from January to December 2018, the worst-case scenario is that a company can be less than 0.05% 18H2 at most in 18H1 and less than 0.05% in one month at most.

For companies that have been on the market for less than 12 months:

1) if the listing time is less than 6 months, all months need to meet the requirement that the transaction volume circulation ratio should reach 0.05%; 2) if the listing time is more than 6 months, the transaction volume circulation ratio requirement of less than 0.05% should not be reached in more than one month.

In addition, if the company does not meet the above liquidity criteria in a certain month, you can use the standby method to test again. If the test is successful, it still meets the liquidity criteria in that month, and if the test is not successful, it will not be met in that month. The method is as follows:

1) calculate the total turnover of the subject in that month

2) if the total turnover of the subject matter in that month is the first 90% of the monthly turnover of all qualified securities in the market, it will still be regarded as passing the trading volume requirements of that month.

Note:

1) for the suspension of listing, the liquidity of the time that can be calculated during the listing period shall be calculated.

2) the number of adjusted free-floating shares of each company at the end of the month is calculated internally by Hang Seng, which may be different from that announced by Bloomberg and Wonder.

two。 The relationship between Hang Seng Composite Index and large, medium and small Indexes:The Hang Seng Composite Index is the collection of targets contained in the Hang Seng large, medium and small indices.

The Hang Seng Composite Index is the collection of targets contained in the Hang Seng large, medium and small Indexes. After selecting all the targets of the Hang Seng Composite Index, the selection criteria of the Hang Seng Composite Index are based on the following conditions:

1) Hang Seng large Index: after adding up the 12-month average circulating market value of all companies in the newly adjusted Hang Seng Composite Index, companies that are already in the large index will be transferred out if it is less than 83% of the total market capitalization. if the market value of the transferred company is in the top 97%, it will be adjusted to medium; if it is in 97%, it will be adjusted to small. Companies that are not in the Hang Seng Composite Index can enter the large index if their market capitalization is in the top 77%.

2) Hang Seng medium Index: after adding up the average 12-month circulating market value of all companies in the newly adjusted Hang Seng Composite Index, it is already in the target of the medium index, if it is lower than 97% this time, it will be transferred out, if it is at 77%, 80%, it will be transferred to large; if it is in 95%, it will be adjusted to small; companies that are not in the Hang Seng Composite Index can enter the medium index if their market capitalization is between 77% and 93%.

3) Hang Seng Mini Index: the target already in the Hang Seng Mini Index, if the 12-month average tradable market value is less than the top 96% of the sum of the 12-month average tradable market value of a specific stock selection range, it will be excluded from the mini-index; if the 12-month average tradable market value is higher than the top 94% of the sum of the 12-month average tradable market capitalization of a specific stock selection range, it will be included in the Hang Seng Mini Index.

3. When on earth will BABA be able to enter Hong Kong Stock Exchange?

We discussed in the previous report that although BABA has been included in the Hang Seng Composite Index, when it will be included in the Hang Seng Index and Hong Kong Stock Connect is still uncertain.

Our point of view is:In the most optimistic scenario, BABA may be included in the Hong Kong Stock Connect about six months after its listing.

We discussed three situations of BABA's entry into the Hong Kong Stock Exchange:

A) simply consider "different rights of the same share": given that BABA should be able to meet the requirement that the average daily market capitalization is not less than HK $20 billion and the total turnover is not less than HK $6 billion, it only needs to be listed for six months and 20 trading days after the Hong Kong Stock Exchange.

At present, BABA is still a secondary listed company in Hong Kong. At present, neither the Shanghai Stock Exchange nor the Shenzhen Stock Exchange has made any relevant interpretations and amendments to the measures for the inclusion of "secondary listed" companies in the Hong Kong Stock Connect, nor have any "secondary listed" companies been included in the precedent. Therefore, if mainland regulators provide guidance on the attribute of "secondary listing", it may have a variable effect on the process of BABA's inclusion in the Hong Kong Stock Connect.

C) BABA can convert more US stocks ADS to the HKEx for registration and trading in the future, but if 55 per cent or more of BABA's global trading volume is traded on the HKEx in the most recent fiscal year, BABA will lose his "secondary listing" attribute and be regarded as a "dual major listing" in Hong Kong, and the primary listing place can be changed from the United States to Hong Kong. In this way, BABA can be regarded as a "simple" company with different rights in the same share similar to XIAOMI and Meituan, and it is incorporated into the rules in accordance with the current "different rights in the same share".

However, we think that the situation should be a relatively long-term development process, and once BABA chooses to place most of his transactions in the Hong Kong stock market and regards Hong Kong as the "primary listing place", in the future, we will also face problems such as adapting to the listing rules, exemption and disclosure of different exchanges, and may increase compliance costs.

To sum up, we think that based on the inclusion of the existing Hong Kong Stock Connect into the implementation rules, BABA can be included in the Hong Kong Stock Connect as soon as possible about six months after listing.

However, we still emphasize that due to the particularities of "different rights of the same shares", "secondary listing" and "convertibility of US and Hong Kong stocks", BABA was later incorporated into the specific rules of the relevant indices and Hong Kong stock links. We still need to wait for the guidance of the mainland exchange and the Hong Kong stock exchange.

In addition, as to when to include the Hang Seng Index, the Hang Seng Index is composed of 50 blue chips from the core of Hong Kong stocks, which is currently not allowed to include "different rights of the same share" and "secondary listed" companies. Hang Seng Index companies began to consult on whether to allow the Hang Seng Index to include "secondary listing" and "different rights of the same share" companies on January 13, 2020, and the consultation results are expected to be released in May 2020. If BABA is allowed to be included in the consultation result, we think it will be approved in the quarterly review of the Hang Seng Index in August 20 at the earliest and included in September.

On the whole, BABA's "return" to Hong Kong stocks is oriented to the "local market" and mainland funds that are more familiar with the company's business. In the future, with the inclusion of Hong Kong Stock Connect, it is possible to rebalance the pricing power of domestic and foreign investors. Moreover, since the listing of BABA, the demonstration effect is obvious. a few days ago, Bloomberg reported that the HKEx was discussing the secondary listing with Trip.com and NetEase, Inc, indicating that the HKEx has maintained an open attitude in embracing the new economy companies. we think that after 19 years of twists and turns, Hong Kong stocks will follow the route of strengthening the strength of the "new economy plus southward capital" and regain their vitality.