Zhongxin Securities released a research report stating that the Hang Seng Composite Index will welcome the results of a new review on August 16, and the adjustment will officially take effect on September 9. The corresponding adjustments will also be made to the Hong Kong Stock Connect, and the bank expects 20 symbols to be included in the Hong Kong Stock Connect, with higher weightings on information technology, optional consumer, and energy sectors. If Alibaba-SW (09988) successfully converts to dual primary listing by the end of August, it may be included in the Hong Kong Stock Connect.

The main points of the Citic Securities research report are as follows:

Preview of Hang Seng Composite Index and Hong Kong Stock Connect inclusion.

20 symbols are expected to be added to the Hong Kong Stock Connect, with 9 of them new listings since the second half of 2023. After the market closes on August 16, 2024, Hang Seng Indexes Company will announce the half-yearly review results of the Hang Seng Index Series (review period from July 1, 2023 to June 30, 2024). This adjustment will officially take effect on September 9, and the corresponding Hong Kong Stock Connect list will also be adjusted on the same day. Based on the latest screening standards of the Hang Seng Composite Index and Hong Kong Stock Connect, we predict that 20 symbols will be newly added to the Hong Kong Stock Connect, with the predicted threshold for market capitalization being approximately HKD 5.8 billion. Among them, 9 symbols are newly listed symbols since the last review deadline (June 30, 2023). The industries with higher weightings in the predicted list of inclusions are information technology, optional consumer, and energy, with 6/3/3 symbols predicted to be added respectively, and the proportion of market capitalization is 41.5%/14.3%/12.2%.

Among the 20 symbols to potentially be added to the Hong Kong Stock Connect, 6 are from the information technology sector, including Mofitime, QUANTUMPH-P, Quzhi Group, Zhixing Automobile Technology, Shengneng Group, and Easou Technology. 3 are from the Optional Consumer sector, including Auto Street, Tianli International Holdings, and Laopu Gold. 3 are from the Energy sector, including MONGOL MINING, Dalipal Holdings, and Sinopec SEG. 3 are from the Industrial sector, including Zonqing Ltd, Hao Tian Intl, and China Creation Ventures. 2 are from the Financial sector, including HEC CJ Pharm and DL Holdings GP. 2 are from the Medical Care sector, including Meizhong Jiahe and HEC CJ Pharm. 1 is from the Essential Consumer sector, which is Dakang Agriculture and Animal Husbandry.

If Alibaba-SW successfully converts to dual primary listing by the end of August, it may be included in the Hong Kong Stock Connect. According to the financial report released by Alibaba Group on May 14th, the company is expected to complete the conversion from secondary to dual primary listing by the end of August this year. According to the regulations for the inclusion of same-share different-rights stocks that convert to dual primary listing in the Hong Kong Stock Connect, the inspection date is the second Hong Kong stock trading day before the regular adjustment effective date for Hang Seng Composite Index constituent stocks after its conversion to primary listing (Alibaba’s announcement predicts the end of August 2024). Considering that the average daily market value of Alibaba-SWs for the past 183 days is HKD 147.18 billion, and the total turnover is HKD 45.71 billion, which has far exceeded the conditions for inclusion for same-share different-rights enterprises, we believe that if Alibaba successfully converts to dual primary listing by the end of August, it may be included in the Hong Kong Stock Connect. We tracked the ETFs that are currently linked to the Hong Kong Stock Connect and Hong Kong Stock Connect relevant indexes. If Alibaba can be successfully included in the Hong Kong Stock Connect, we expect an increase in passive funds of around HKD 4.03 billion (Alibaba-SW's average daily turnover since the beginning of the year is about HKD 3.7 billion). However, we should also pay attention to the risks if Alibaba fails to convert to dual primary listing by the end of August, and if the inspection date is different from our expectations.

Keep an eye on timing opportunities for adjustments in the Hong Kong Stock Connect.

According to our calculation, from the announcement date of Hang Seng Composite Index since 2019 to the effective date of the Hong Kong Stock Connect, the predicted average excess return of the target included relative to the Hang Seng Composite Index reached 5.5%. However, in the 30 days after the effective date of Hong Kong Stock Connect, the average excess return of the included targets has dropped significantly and the relative excess return to the Hang Seng Composite Index since 2019 is only 0.2%. We found that the average excess return of the included targets in the period from the announcement date of Hang Seng Composite Index in mid-2023 to the effective date of Hong Kong Stock Connect significantly declined to 0.8%. However, this is mainly due to the impact of the surge in long-term US bond yields in the third quarter of 2023, which makes it easier for growth sector stocks to be suppressed. The excess return of the included targets in early 2024 increased again. Considering that the overall valuation of Hong Kong stocks is currently at a historical low point and the outflow of funds and further market retracement space is limited, we still recommend investors to focus on timing opportunities from the announcement date of Hang Seng Composite Index to the effective date of Hong Kong Stock Connect. In addition, due to the fact that some arbitrage funds may position themselves early before the effective date of Hong Kong Stock Connect and passive funds may adjust their portfolio the day before the effective date (September 6), some stocks with poorer liquidity may be affected by the adjustment of funds.

Investment strategy:

1. There are errors in the calculation; 2. The domestic policies are launched and the economic recovery is lower than expected; 3. Overseas central banks tighten monetary policies more than expected; 4. The relationship between China and the United States further deteriorates.