The Hang Seng Tech Index is set for a historic transformation. On August 10, Hang Seng Indexes Company announced a proposal to significantly revamp the index, aiming to enhance its market representation amid the evolving landscape of Hong Kong's technology sector. The key changes involve expanding the number of constituent stocks from 30 to 50 and introducing artificial intelligence as a standalone theme, moving away from its previous classification as a sub-theme. This adjustment follows criticism that the index had become overly reliant on internet companies, even earning the nickname "Takeout Index" due to the intense competition among food delivery platforms. The consultation period for the revision is currently underway, with the final changes expected to be announced in late September and implemented during the index rebalancing in December.
The revision addresses two main areas: broadening the thematic coverage and overhauling the stock selection mechanism. The existing six technology themes will be restructured into five core categories: Digital Platforms & Solutions, Artificial Intelligence, Advanced Hardware, Robotics & Automation, and Cloud & Frontier Technology. The number of sub-themes will also expand from 16 to 24, including new areas like Renewable Energy Storage & Materials and AI Infrastructure. In terms of stock selection, the universe will be limited to the Hang Seng Composite LargeCap & MidCap Index to ensure investability. A new group-based selection method will be introduced, with 40 stocks chosen by market capitalization and the remaining 10 slots reserved for high-growth companies that are not captured by the market cap ranking, based on their revenue growth over the past 12 months. Liquidity and innovation screening requirements will remain unchanged.
Hang Seng Indexes Company noted that the assets under management for funds tracking the Hang Seng Tech Index have surged to $40.4 billion (approximately 272.5 billion yuan) as of June, up nearly 26 times from $1.5 billion at its launch in 2020. Domestically, there are 13 ETFs tracking the index, with a combined size of 163.645 billion yuan as of August 7. The largest is the China AMC Hang Seng Tech ETF with a scale of 43.175 billion yuan, followed by the Huatai-PineBridge Hang Seng Tech ETF at 34.52 billion yuan. Other ETFs from E Fund Management, Dacheng Fund, China Asset Management, and GF Fund have also surpassed the 10-billion-yuan mark. These funds will need to adjust their holdings in line with the index changes.
Key Implications of the Revision
According to the simulated results released by Hang Seng Indexes Company, the revision will bring three significant changes to the index's characteristics. Firstly, the concentration of the top 10 constituents will decrease slightly, from the current 70.6% to 66.3%, diversifying the index's exposure to the largest companies. However, the largest company will still be included, with the simulated maximum market capitalization remaining at 3,921 billion Hong Kong dollars. Secondly, the thematic distribution will become more diverse. Under the new structure, the number of constituents related to Advanced Hardware will increase from 5 to 15, and those related to Artificial Intelligence will rise from 3 to 6. New themes like Frontier Technology will also find room for inclusion. Thirdly, the revenue growth group will introduce high-growth targets. The simulated results show that the 10 new stocks added through the revenue growth group have a median revenue growth rate of 82%, significantly higher than the 23.4% for the new stocks added via the market cap group and far above the 13.8% growth rate of the existing constituents. This core intention of the revision is to broaden the investable universe of tech stocks while providing a pathway for high-growth, smaller-capitalization companies to be included in the index.
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