CITIC Securities pointed out that 24 companies, such as China Resources Beverage (02460) and KE Holdings (02423), are expected to be included in the Hong Kong Stock Connect, while 27 companies may be removed.
According to Zhitong Finance APP, the Hang Seng Index Company will announce the semi-annual review results of the Hang Seng series indexes on February 21 (Friday) after the market closes (the review cut-off date is December 31, 2024). In this regard, China International Capital Corporation recently released a preview of the adjustment of Hong Kong Stock Connect and the Hang Seng Index. CICC indicated that 24 companies, such as China Resources Beverages (02460) and KE Holdings (02423), are expected to enter the Hong Kong Stock Connect, while 27 may be removed. NIO-SW (09866), JD.com Logistics (02618), INNOVENT BIO (01801), and POP MART (09992) are among the top candidates for inclusion in the Hang Seng Index adjustment list.
CICC's main points are as follows:
On February 21, 2025 (Friday) after the market closes, the Hang Seng Index Company will announce the semi-annual review results of the Hang Seng series indexes (the review cut-off date is December 31, 2024), involving the major flagship indexes of Hong Kong stocks such as the Hang Seng Index, the State-owned Enterprises Index, and the Hang Seng TECH Index, as well as the Hang Seng Composite Index, which is closely related to the investment scope of Hong Kong Stock Connect. Since semi-annual reviews usually see significant changes and the scale of passive funds tracking the flagship indexes is large (according to the Statistics from Bloomberg and Wind, the ETF scale tracking the Hang Seng Index, the State-owned Enterprises Index, and the Hang Seng TECH Index are approximately $27.53 billion, $5.41 billion, and $18.66 billion respectively), potential changes in constituent stocks and corresponding Capital Trend warrant close attention. Based on existing publicly available data, we preview potential adjustments as follows for investors' reference.
Hang Seng Index adjustments: NIO-SW, JD.com Logistics, INNOVENT BIO, and POP MART rank among the top candidates for inclusion.
Potential adjustment candidates: Based on the adjustment methodology of the Hang Seng Index and through the understanding and verification of non-algo adjustment criteria via previous actual adjustment results, we estimated a list of potential candidates that are likely to be added, ranking at the front of the Hang Seng Index. Our calculations prioritize Market Cap rankings, combined with factors such as industry representation and coverage. Based on the above predictions, we estimated the possible weights of the relevant individual stocks and Capital Trend in the report text.
However, it should be pointed out that historical experience shows that actual results may differ significantly from this ranking-based screening. For instance, INNOVENT BIO and JD.com Logistics ranked high in previous predictions but ultimately were not included, likely due to factors representing the industry and listing location decision-making processes used by index advisory committees that are not fully detailed or quantified. There may also be other non-quantified factors influencing the final decision.
Adjustment of the Stock Connect and the Hang Seng Composite Index: It is expected that 24 companies such as China Resources Beverage and KE Holdings are likely to be included, while 27 may be removed.
This adjustment coincides with the semi-annual index review of the Hang Seng Composite Index (which adjusts twice a year, with June 30 and December 31 as the cutoff dates). Since the Hang Seng Composite Index serves as the sample space for investment in Stock Connect, its changes will directly affect the investable range of the Stock Connect. It is worth mentioning that this adjustment also coincides with the first implementation of the Hang Seng Index company's optimization of the calculation method for the sample's 12-month average market cap (changing from the average market cap at the end of each month over the past 12 months to the average market cap on each trading day excluding suspensions) and the sorting method for long-suspended symbols (market cap and liquidity data before resumption will be excluded from the testing calculation).
Based on the adjustment method of the Hang Seng Composite Index, and in conjunction with additional criteria for inclusion in the Stock Connect (such as the requirement that Small Cap stocks under the Hang Seng Index have a market cap of over 5 billion HKD, excluding stocks under risk warnings from the Exchange, stocks that are suspended from trading or enter the delisting arrangement period; companies with Weighted Voting Rights also must meet additional conditions like being listed for 6 months and 20 trading days, as well as market cap and trading volume conditions), an estimated total of 24 stocks may meet the criteria for inclusion in the Stock Connect. Conversely, we estimate that 27 stocks may be removed from Stock Connect due to a market cap of less than 4 billion HKD, being ranked lower than 96% in market cap coverage, or being suspended, with specific details of the inclusion and removal forecasts provided in the original report.
In addition, KE Holdings returned to the Hong Kong stock market for dual primary listing in mid-2022 and is currently part of the large-cap components of the Hang Seng Composite Index. Due to the nature of Weighted Voting Right Stocks, inclusion in the Stock Connect requires additional conditions: 1) being listed for at least 6 months and 20 trading days; 2) an average market cap of not less than 20 billion HKD and a trading volume of not less than 6 billion HKD over the 183 days prior to the assessment date. Our calculation shows that as of 183 days before December 31, 2024, its average daily market cap reached 161.12 billion HKD, and total trading volume reached 16.16 billion HKD, meeting the requirements for Weighted Voting Right Stocks' inclusion in the Stock Connect, therefore we expect KE Holdings to undergo a review for inclusion in Stock Connect around March 6 and to be included around the adjustment on March 10. Similarly, we have calculated that the daily market cap and trading volume of Siasun Robot&Automation, which listed on the Hong Kong stock exchange on October 24, 2024, also meet the requirements for inclusion as a company with Weighted Voting Rights, but since it has not been listed for 6 months and 20 trading days, it may not be included this time, although it is highly likely to be included in the next regular review in September 2025.
Timeline: Announcement after market close on February 21, with execution on March 10; adjustments to the Stock Connect symbols will follow.
In terms of timing, the Hang Seng Index Company will announce the official results of the adjustments to the Hang Seng series indices after market close on February 21, 2025 (Friday), and the adjustments will take effect on March 10 (Monday). After the index adjustment takes effect on March 10, the Shanghai and Shenzhen stock exchanges will subsequently adjust the investable symbols for the Shanghai-Hong Kong and Shenzhen-Hong Kong Stock Connect based on this (the specific timing will depend on announcements from the exchanges).
During this period, similar to the MSCI index adjustments, some active funds may still undertake certain arbitrage operations based on the announced results of the adjustments, but passive funds will choose to adjust their portfolios on the trading day before the effective date (that is, March 7) to minimize tracking errors. At that time, related stock trading volumes may experience "abnormal spikes" much larger than usual, especially near the closing.