CICC: Hang Seng series index adjustments, Alibaba and others may face passive reduction due to significant price increases

On February 21, 2025, after the market closed, the Hang Seng Index Company announced its regular quarterly index adjustment results (this review is based on the assessment date as of December 31, 2024, and is generally published within 8 weeks after the assessment date). This adjustment covers major flagship indices of Hong Kong stocks such as the Hang Seng Index, the Hang Seng China Enterprises Index, and the Hang Seng Tech Index. Additionally, the Hang Seng Composite Index, which directly determines the investable range for the Stock Connect, is also adjusted. We provide a comprehensive analysis for investors' reference.

Hang Seng Series Index Adjustments: The Hang Seng Index remains unchanged; the Hang Seng China Enterprises Index includes ZTO EXPRESS-W and BeiGene; the Hang Seng Tech Index includes Tencent Music-SW and Horizon Robotics-W.

Changes in Constituents:

ZTO EXPRESS-W and BeiGene are included in the Hang Seng China Enterprises Index, while China Biologic Products and Li Ning are removed; Tencent Music-SW and Horizon Robotics-W are included in the Hang Seng Tech Index, while Dongfang Zhenxuan and ZhongAn Online are removed.

1) Hang Seng Index: There are no inclusions or exclusions this time, maintaining 83 constituents unchanged.

2) Hang Seng China Enterprises Index: This adjustment includes ZTO EXPRESS-W and BeiGene, with inclusion weights of 0.72% and 1.30%, respectively; Li Ning and China Biologic Products are removed, with weights before removal of 0.39% and 0.35%. The number of constituents remains at 50.

3) Hang Seng Tech Index: This adjustment includes Tencent Music-SW and Horizon Robotics-W, with inclusion weights of 0.07% and 0.34%, respectively; Dongfang Zhenxuan and ZhongAn Online are removed, with weights before removal of 0.23% and 0.46%, maintaining 30 constituents unchanged.

Capital Flow Estimation:

Focus on the positive impact on BeiGene, ZTO EXPRESS-W, Tencent Music-SW, and Horizon Robotics-W; and the negative impact on Li Ning, China Biologic Products, Dongfang Zhenxuan, and ZhongAn Online. Based on Bloomberg's summary, the tracked capital scale of the Hang Seng Index ETF is approximately USD 31.49 billion, while the ETFs tracking the China Enterprises and Hang Seng Tech indices are approximately USD 6.81 billion and USD 22.08 billion, respectively. Combining the above constituent and weight changes, along with the average daily trading volume of individual stocks over the past 3 months, we estimate the potential impact of passive capital changes:

1) Hang Seng Index: Although there are no adjustments to the index constituents, the changes in weights lead to the longest time required for passive capital inflow for Hengan International, Industrial and Commercial Bank of China, and Hong Kong and China Gas, which we expect to bring in USD 3.15 million, USD 94.47 million, and USD 6.30 million, respectively, with inflow times of approximately 0.45 days. In terms of capital outflow, CITIC Limited, Alibaba-W, and HSBC Holdings experience the most significant passive capital outflow due to reduced weights, with outflow times of 1.2 days, 0.6 days, and 0.5 days, respectively.

2) Hang Seng China Enterprises Index: The longest time required for passive capital inflow is for the newly included BeiGene and ZTO EXPRESS, which we expect to bring in USD 88.50 million and USD 49.02 million, respectively, with inflow times of approximately 2.7 days and 1.7 days In terms of capital outflow, China Biologic Products and Li Ning, with current weights of 0.35% and 0.39%, will bring about USD 23.83 million and USD 26.55 million in passive capital outflow, with outflow times of 1 day and 0.6 days, respectively.

3) Hang Seng Technology: The longest time required for passive capital inflow is for Tencent Music-SW and Horizon Robotics-W, which we expect to bring in USD 15.46 million and USD 75.08 million, with inflow times of 33.1 days and 3.3 days, respectively. In terms of capital outflow, ZhongAn Online and Dongfang Zhenxuan, with current weights of 0.46% and 0.23%, will bring about USD 101 million and USD 50.79 million in passive capital outflow, with outflow times of approximately 8.4 days and 1.4 days, respectively.

Impact on Leading Stocks:

In the past month, the AI boom has led to a narrative of asset price revaluation in China, especially in the Hong Kong stock market. Compared to last year's "924" market, this round of increase has been more concentrated at the top, with a few leading tech stocks driving or even determining the index's gains. However, since the main indices in the Hang Seng series limit individual stock weights to no more than 8%, we see that after this index adjustment, some stocks that have recently risen significantly and exceeded the 8% weight (such as Alibaba, Tencent, Xiaomi, etc.) will have their weights "reduced" passively.

1) Alibaba: Due to the recent rapid rise, Alibaba's current weights in the Hang Seng Index, Hang Seng China Enterprises Index, and Hang Seng Technology Index have reached 10.12%, 9.82%, and 9.16%, all exceeding 8%. After this adjustment, Alibaba's weights in the aforementioned indices will be reduced to 8%. Considering the current scale of ETFs tracking these indices, we estimate that the potential passive capital outflow from Alibaba after this adjustment will be USD 670 million, USD 120 million, and USD 260 million, respectively. However, due to the significant increase in Alibaba's average daily trading volume recently, the longest required outflow time will not exceed 0.6 days;

2) Tencent Holdings: After the recent rise, Tencent Holdings currently has weights of 8.48% and 8.22% in the Hang Seng Index and Hang Seng China Enterprises Index, respectively. However, its weight in the Hang Seng Technology Index is about 7.67%. After this adjustment, Tencent's weights in the aforementioned indices will be adjusted to 8%. Considering the current scale of ETFs tracking these indices, we estimate that the passive capital outflow from Tencent in the Hang Seng Index and Hang Seng China Enterprises Index after this adjustment will be USD 15 million and USD 14.98 million, respectively, while passive capital tracking the Hang Seng Technology Index will flow into Tencent USD 7.287 million. The required trading time will not exceed 0.1 days;

3) Xiaomi Group: Xiaomi Group currently has weights of 8.84% and 10.59% in the Hang Seng China Enterprises Index and Hang Seng Technology Index, respectively. After this adjustment, Xiaomi's weights in the aforementioned indices will be adjusted to 8%. Considering the current scale of ETFs tracking these indices, we estimate that the passive capital outflow from Tencent in the Hang Seng Index and Hang Seng China Enterprises Index after this adjustment will be USD 57.19 million and USD 570 million, respectively. The required trading time is close to 0.7 days. However, after this adjustment, Xiaomi's weight in the Hang Seng Index will increase from the current 5.95% to 6.24%, corresponding to a passive capital inflow of approximately USD 91.32 million The required trading time is approximately 0.1 days.

Adjustment of Hong Kong Stock Connect Targets: 27 Stocks Meet Inclusion Criteria, 25 Stocks May Be Removed

This coincides with the semi-annual index review of the Hang Seng Composite Index (which is adjusted twice a year, with deadlines at the end of June and December), and this will again serve as the main basis for the investable scope of the Hong Kong Stock Connect. Based on the adjustment situation combined with the inclusion requirements of the Hong Kong Stock Connect, we analyze the possible adjustments of the Hong Kong Stock Connect targets as follows.

27 stocks may meet the inclusion criteria for the Hong Kong Stock Connect: InnoCare Pharma, China Resources Beverage, CITIC Financial Assets, Health Road, Mao Ge Ping, Lu Kong, Wei Long Delicious, Universal Gold Group, Yi Mai Yang Guang, Crystal International, Shou Cheng Holdings, Xiao Cai Yuan, Guo Fu Hydrogen Energy, Yue Jiang, Tong Yuan Kang Pharmaceutical-B, iFlytek Medical Technology, Reshape Energy, Zhong Chuang Xin Hang, Lion Holdings, You Jia Innovation, Eagle King, Xi Rui, De Xiang Shipping, Duo Dian Smart, Hong Kong China Travel, Ark Health and Hua Hao Zhong Tian Pharmaceutical-B. Compared to the 24 stocks we predicted to be likely included in the Hong Kong Stock Connect in our January report "Preview of Hong Kong Stock Connect and Hang Seng Index Adjustment (2025-2)", this time there are a total of 23 stocks expected to be smoothly included. However, due to the lack of public disclosure by the Hang Seng Index Company regarding the float factor, leading to uncertainty in the calculation of circulating shares and turnover rate, there are still 4 stocks that were not captured by our model during the prediction, and we will continue to optimize this.

25 stocks may be removed from the Hong Kong Stock Connect: including Chow Tai Fook, Kintor Pharmaceutical-B, Lykai Pharmaceutical-B, Zhihu-W, Asia Cement (China), Innovation Works, Rainbow International Group, SOHO China, Value Partners Group, Agile Group, Tianlun Gas, Meidong Automotive, New Energy, Xuhui Holdings Group, Dreamland, Sima Medical, Yiming Anke-B, Nayuki's Tea, Baiguoyuan Group, Green Scene China Real Estate, Kedi-B, Gao Shi Medical, Marco Digital Technology, Jingji Financial International, and Junsheng Tai Pharmaceutical-B.

It is worth mentioning that Beike-W returned to the Hong Kong Stock dual primary listing in mid-2022 and is currently a component of the large-cap stocks in the Hang Seng Composite Index. Due to the dual-class share structure, inclusion in the Hong Kong Stock Connect requires additional conditions: 1) listed for more than 6 months and 20 trading days; 2) average market capitalization of no less than HKD 20 billion and trading volume of no less than HKD 6 billion in the 183 days prior to the assessment date. We estimate that as of December 31, 2024, the average daily market capitalization of its Hong Kong shares reached HKD 161.12 billion, and the total trading volume reached HKD 16.16 billion, meeting the requirements for dual-class share companies to be included in the Hong Kong Stock Connect. Therefore, we expect Beike-W to be included in this round. In addition, Horizon Robotics-W, which was listed on October 24, 2024, has been included in the Hang Seng Composite Index this time, but similarly, due to its dual-class share structure, it needs to meet the additional requirements of being listed for 6 months and 20 trading days, so it may not be included this time, but it is highly likely to be included after meeting the listing time requirements.

Adjustment Schedule: Implementation on March 7, Officially Effective on March 10

The above index adjustment results will officially take effect on March 10 (Monday). During this period, some active funds may still engage in certain arbitrage operations based on the announced adjustment results, but passive funds will choose to adjust their positions on the trading day before the effective date (i.e., March 7) to minimize tracking errors. We expect that related stocks may experience "abnormal trading volume" significantly greater than usual, especially towards the end of the trading day. Meanwhile, the official inclusion of the Hong Kong Stock Connect list will also be announced on March 7 on the Shanghai Stock Exchange website and will officially enter Hong Kong Stock Connect trading on March 10.

Chart 1: After this adjustment, the proportion of consumer sectors in the Hang Seng Index has decreased, while the proportions of the financial and utility sectors have increased Source: Bloomberg, Wind, CICC Research Department

Chart 2: After this adjustment, the weight limit of consumer discretionary and information technology in the Hang Seng China Enterprises Index has decreased, while the proportions of financials and healthcare have increased Source: Bloomberg, Wind, CICC Research Department

Authors: Liu Gang S0080512030003, Zhang Weihang S0080524010002, Source: CICC Insights, Original Title: "CICC: Analysis of the Impact of Hang Seng and Hong Kong Stock Connect Adjustments (2025-2)"

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