CICC released a research report stating that Hang Seng Indexes Company has announced the results of its regular quarterly index review, covering major flagship Hong Kong stock indices such as the Hang Seng Index, the Hang Seng China Enterprises Index, and the Hang Seng Tech Index. Regarding industry coverage and representation, the market coverage of the industrial and healthcare sectors has increased. According to the Hang Seng Indexes Company's industry classification, after this adjustment, the coverage of the healthcare sector has risen from 38.8% to 44.3%, and the coverage of the industrial sector has increased from 54.3% to 56.0%. Furthermore, the Hang Seng Composite Index, which directly determines the scope of investable stocks under the Southbound Stock Connect, was also adjusted. Based on this adjustment and the additional requirements for inclusion in the Stock Connect, the firm estimates that six stocks may meet the criteria for inclusion. Among them, MINIMAX-WP, which entered the Hang Seng Composite Index this time, has a weighted voting rights structure. It must additionally meet the conditions of being listed for six months and 20 trading days, therefore it will not be included in the Southbound Stock Connect in the June adjustment and is expected to be included in August. The main views of CICC are as follows:
Index Adjustments: BEIGENE, J&T EXPRESS-W, and CHALCO were added to the Hang Seng Index; HANSOH PHARMA and AKESO were added to the Hang Seng China Enterprises Index; KNOWLEDGE ATLAS and MINIMAX-WP were added to the Hang Seng Tech Index.
Component Changes: BEIGENE (weight 1.30%), J&T EXPRESS-W (weight 0.30%), and CHALCO (weight 0.24%) were added to the Hang Seng Index, increasing the number of constituents to 93. HANSOH PHARMA (weight 0.46%) and AKESO (weight 0.76%) were added to the Hang Seng China Enterprises Index, with the number of constituents remaining unchanged at 50. KNOWLEDGE ATLAS (weight 0.53%) and MINIMAX-WP (weight 0.36%) were added to the Hang Seng Tech Index, with the number of constituents remaining unchanged at 50.
Fund Flow Estimates: Based on Bloomberg data, ETFs tracking the Hang Seng Index have assets under management of approximately $27.76 billion, while those tracking the Hang Seng China Enterprises Index and Hang Seng Tech Index have AUM of about $8.60 billion and $52.04 billion, respectively. Combining the aforementioned component and weight changes with the average daily turnover of individual stocks over the past three months, the firm estimates the potential impact of passive fund flows.
How might KNOWLEDGE ATLAS and MINIMAX-WP perform after being added to the Hang Seng Tech Index? The inclusion of the two large model companies, KNOWLEDGE ATLAS and MINIMAX-WP, aligns with expectations and the Hang Seng Indexes Company's direction to optimize the Hang Seng Tech Index by embracing "new technology." Their medium-to-long-term performance will depend on industry trends and fundamentals. Both AI large model companies have shown strong performance post-listing, driven by growth expectations and the AI narrative. Judging by the price-to-sales ratio (P/S), the current sales yield (S/P) for KNOWLEDGE ATLAS and MINIMAX-WP is on par with the 1-year government bond yield. Valuation is one dimension reflecting short-term sentiment and potential overvaluation. In the short term, from a sector fundamental perspective, AI large models are still in the early stages of industrial development, with vast potential, technological iteration, scenario penetration, and commercial implementation offering ample room for imagination. Compared to the internet bubble at the turn of the century, current global AI demand is similar to 1998-1999, investment intensity and corporate investment capacity are close to 2000, and secondary markets resemble 1997-1998. Looking ahead, the Q2 earnings reports of US and Chinese stocks in July may become a key node. If AI remains the core theme throughout the year and sector sentiment does not undergo a trend change, then short-term volatility caused by factors like share lock-up expirations may instead create better price windows for medium-to-long-term positioning.
Adjustments to Southbound Stock Connect Constituents: Six Stocks Expected to Meet Inclusion Criteria As this is a quarterly index review, only stocks meeting the fast-track inclusion mechanism are considered for the semi-annual adjustment of the Hang Seng Composite Index. Based on the adjustment to the Hang Seng Composite Index and the additional requirements for Stock Connect inclusion, the firm estimates that six stocks may meet the criteria for inclusion. MINIMAX-WP, which entered the Hang Seng Composite Index this time, has a weighted voting rights structure. It must additionally meet the conditions of being listed for six months and 20 trading days, therefore it will not be included in the Southbound Stock Connect in this June adjustment. If it subsequently meets the market capitalization and turnover requirements, it is expected to be included in the Stock Connect in August.
Post-Adjustment Index Characteristics: Increased Weightings for Healthcare, Information Technology, and Industrial Sectors; Decreased Weightings for Financials and Consumer Sectors Index Expansion: The number of Hang Seng Index constituents has increased to 93. According to the consultation results released by Hang Seng Indexes Company in March 2021, the number of Hang Seng Index constituents was planned to increase to 80 by mid-2022 and eventually be fixed at 100. The index is still expanding towards this target.
Industry Coverage and Representation: Market coverage of the industrial and healthcare sectors has increased. According to the Hang Seng Indexes Company's industry classification (seven sectors), after this adjustment, the coverage of the healthcare sector has risen from 38.8% to 44.3%, and the coverage of the industrial sector has increased from 54.3% to 56.0%.
Sector Weightings: The weightings of healthcare, information technology, and industrial sectors have increased, while those of financials, consumer, and utilities & telecommunications sectors have declined. After this adjustment, the market capitalization weighting of new economy stocks in the Hang Seng Index slightly increased from the current 47.5% to 48.9%. At the sector level, the weightings of healthcare, industrial, and information technology sectors increased from the current 3.6%, 11.5%, and 14.8% to 4.7%, 11.8%, and 15.5%, respectively. However, the weightings of the financials and utilities & telecommunications sectors declined from the current 33.8% and 6.7% to 32.5% and 6.4%, respectively.
Adjustment Schedule: Effective June 8 The above index adjustments will officially take effect on June 8 (Monday). During this period, some active funds may still engage in certain arbitrage operations based on the announced results. However, passive funds, to minimize tracking error, will adjust their positions on the trading day before the effective date (i.e., June 5). The firm expects that trading volume for related stocks may see "abnormal surges" far exceeding normal levels at that time, especially during the closing session.
Chart: After this adjustment, the Hang Seng Index's coverage of the healthcare and industrial sectors has increased. Chart: Among sector weightings, information technology, healthcare, and industrial sectors saw increases, while the financials sector declined. Chart: ETF fund sizes tracking the Hang Seng Index, Hang Seng China Enterprises Index, and Hang Seng Tech Index.
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