20180813-中国银河国际证券-Strategy__HSI_Review__Surprising_Removal_of_BEA__Preview_of_Southbound_Additions_Deletions_4页_1mb

HSI Review Summary: Surprising Removal of BEA and Southbound Additions/Deletions

Core Content

The Hang Seng Indexes Company announced the results of its quarterly review on September 10, affecting the Hang Seng Index (HSI) and the Hang Seng Composite Index (HSCI). The review included the removal of Bank of East Asia (0023.HK) and the addition of Sino Biopharm (1177.HK) and Shenzhen (2313.HK). Additionally, the half-yearly review of the HSCI was also released, with potential implications for the Southbound Stock Connect list.

Main Points

1. Surprising Removal of Bank of East Asia (BEA)

• Reason for Removal: BEA was unexpectedly removed from the HSI, despite being the seventh smallest stock in the index.
• Sector Diversification: The removal is attributed to the company's low weighting in the financial sector, which already dominates 48.1% of the HSI.
• Market Impact: The removal may trigger significant sell-off due to the potential disposal from index funds equivalent to 36x of its three-month average daily turnover.
• Potential Sell Pressure: The impact is even greater when considering the Tracker Fund (2800.HK), which could lead to a disposal of 9.6x the daily turnover.

2. Additions to HSI

• Expected Additions: Sino Biopharm and Shenzhen were added, aligning with expectations for sector diversification.
• Sector Diversification Priority: The inclusion of these stocks highlights the Hang Seng Indexes Company's focus on diversifying the index across sectors.

3. Southbound Stock Connect List Review

• Review Timing: The results of the HSCI half-yearly review may be included in the Southbound Stock Connect list, with a possible review on August 20.
• Potential Beneficiaries: The following companies are expected to benefit if included in the Southbound Stock Connect list:
  • Ping An Healthcare (1833.HK): No similar player in the A-share market.
  • Country Garden Services (6098.HK): Southbound investors already hold 7.7% of Greentown Service (2869.HK).
  • YiChang HEC (1558.HK): Pharmaceuticals is a preferred sector for Southbound investors.
  • Tong Ren Tang Chinese Medicine (3613.HK): Southbound investors own 12.37% of Tong Ren Tang Tech (1666.HK), which holds a 38.05% stake in Tong Ren Tang Chinese Medicine.
  • JBNY (3306.HK): Widely anticipated for inclusion by mainland brokerages.

4. Stocks Removed from HSCI

• Figure 3 lists stocks removed from the HSCI, which will also be removed from the Southbound Stock Connect list.
• Examples:
  • CP Pokphand Co Ltd (43.HK)
  • Nan Hai Corp Ltd (680.HK)
  • Far East Consortium International (35.HK)
  • Lai Sun Development Co Ltd (488.HK)
  • Regina Miracle International Holdings Ltd (2199.HK)
  • Tibet Water Resources Ltd (1115.HK)
  • HKR International Ltd (480.HK)
  • CK Life Sciences Int'l Holdings Inc (775.HK)
  • Glorious Property Holdings Ltd (845.HK)
  • China Shengmu Organic Milk Ltd (1432.HK)

5. Stocks in HSCI but Possibly Removed from Southbound Stock Connect

• Figure 4 lists stocks that are still in the HSCI but may be excluded from the Southbound Stock Connect list due to factors such as market cap or trading volume.
• Examples:
  • Dalian Port PDA Co Ltd (2880.HK)
  • Beijing Jingcheng Clean Energy Co Ltd (579.HK)
  • FIH Mobile Ltd (2038.HK)
  • Macau Legend Development Ltd (1680.HK)
  • Texwinca Holdings Ltd (321.HK)
  • COSCO SHIPPING International Hong Kong Co Ltd (517.HK)
  • Chaowei Power Holdings Ltd (951.HK)
  • Pax Global Technology Ltd (327.HK)
  • Digital Domain Holdings Ltd (547.HK)
  • Best Pacific International Holdings Ltd (2111.HK)

Key Information

• Market Impact: The removal of BEA may lead to heavy selling pressure due to its low trading volume and potential disposal by index funds.
• Southbound Focus: The inclusion of certain stocks in the Southbound Stock Connect list is driven by sector diversification and the interest of Southbound investors in specific sectors like pharmaceuticals.
• Disappointment: A-Living (3319.HK) and education stocks were not included, despite expectations, suggesting increased selectivity by Hang Seng Indexes Company.
• Disclosure: The report includes disclaimers regarding the accuracy of information, potential conflicts of interest, and analyst certifications.

Conclusion

The quarterly review of the HSI and the half-yearly review of the HSCI reflect a strategic shift towards sector diversification. The removal of BEA is unexpected and may have a significant short-term impact on its stock price. The addition of Sino Biopharm and Shenzhen aligns with this diversification strategy, while the potential inclusion of several stocks in the Southbound Stock Connect list could benefit from increased foreign investor interest. The review process also highlights the growing selectivity of Hang Seng Indexes Company in its criteria for inclusion and exclusion.