Huatai Securities, a Chinese financial firm, has released a research report on the upcoming adjustment of the Hang Seng Composite Index. According to the report, the adjustment list is expected to be announced on August 24, 23 and will become effective on September 4. The report also estimates that the average market capitalization threshold for this round of adjustment will be around HK$6.1 billion, and it has identified 22 companies that are expected to be included in the Hong Kong Stock Connect.
The report highlights three main stock selection logics. Firstly, the preference for small market capitalization stocks. Secondly, a focus on valuation, with an emphasis on stocks with either undervalued characteristics or high growth potential. Lastly, the report categorizes industries into three groups – materials, information technology, and daily and optional consumption – which have shown relatively strong excess returns in previous adjustments.
In terms of the 22 companies expected to be included in the Hong Kong Stock Connect, the report identifies six non-essential consumer companies, six healthcare companies, three IT companies, two real estate and construction companies, two essential consumer companies, one conglomerate, one raw material company, and one utility company.
Furthermore, the report states that of the 22 selected stocks, 11 are newly listed stocks since the first half of this year. The timing of when the stocks were listed does not affect their inclusion in the Hang Seng Composite Index and Hong Kong Stock Connect, as long as they meet the evaluation period requirements.
The report also discusses the timing strategy for the Hong Kong Stock Connect adjustment, referring to it as a “password”. Historical data shows that there is a clear layout window for the timing strategy, which is from the announcement date of the Hang Seng Composite Index adjustment result to the effective date of the Hong Kong Stock Connect adjustment. The report notes that stocks that were included in previous rounds of adjustments during this window period have historically achieved stable excess returns, while stocks excluded from previous rounds have significantly underperformed the market.
In conclusion, Huatai Securities provides insights into the upcoming adjustment of the Hang Seng Composite Index and Hong Kong Stock Connect. The report highlights the estimated number of companies expected to be included, the stock selection logics, and the timing strategy for the adjustment. However, it also warns of potential market risks and the possibility of calculation errors.