20180927-中国银河国际证券-Strategy_MSCI_proposes_increasing_the_A-share_inclusion_factor_from_5__to_20__8页_821kb

MSCI Proposes Increase in A-Share Inclusion Factor and Expansion of Index Coverage

Core Content

MSCI has proposed a series of changes to the MSCI China A Inclusion Index, including increasing the free float adjusted inclusion factor for large-cap A-shares, adding ChiNext stocks, and including mid-cap A-shares in the future. These changes aim to enhance the representation of A-shares in global investment indices and are subject to consultation and approval.

Main Proposals

Proposal A: Increase Inclusion Factor for Large Cap A-Shares

• Inclusion Factor Adjustment: The free float adjusted inclusion factor for large cap A-shares will be increased from 5% to 20% in two stages:
  • May 2019: 12.5%
  • August 2019: 20%
• Consultation Deadline: February 15, 2019
• Decision Announcement: February 28, 2019
• Current Constituents: 235 large-cap A-shares
• Estimated Fund Inflow: At least US$36 billion
• Top 5 Beneficiaries (based on 3-month average daily turnover):
  1. Pudong Development Bank (600000.CH)
  2. Shanghai Electric Group (601727.CH)
  3. Shenwan Hongyuan (000166.CH)
  4. Guosen Securities (002736.CH)
  5. China Yangtze Power (600900.CH)

Proposal B: Add ChiNext Stocks

• Number of Stocks to be Added: 14 ChiNext stocks
• Initial Addition Date: May 2019
• Top 5 Weighted ChiNext Stocks:
  1. Wens Foodstuffs (300498.CH)
  2. East Money Information (300059.CH)
  3. Lepu Medical (300003.CH)
  4. Aier Eye Hospital (300015.CH)
  5. Inovance Technology (300124.CH)
• Rating: CGS Research Team has a "Recommend" rating on Lepu Medical and Aier Eye Hospital

Proposal C: Add 168 Mid-Cap A-Shares

• Effective Date: May 2020
• Inclusion Factor: 20%
• Total Stocks in Index: Will increase from 235 to 434
• Potential Impact: Too early to determine beneficiaries

Key Impacts

• A-Share Weighting in MSCI Emerging Markets Index:
  • Increase: From 0.71% to 3.36%
• A-Share Weighting in MSCI China Index:
  • Increase: From 2.3% to 10.4%
• H-Share, P-Chips, Red Chips, and ADRs Weighting:
  • H-Share: From 31.5% to 28.9%
  • P-Chips: From 27.4% to 25.1%
  • Red Chips: From 13.8% to 12.7%
  • ADRs: From 24.8% to 22.7%
• Potential Fund Outflow: Other China shares may experience outflows if there is no new inflow to China equities

Technical Consultations

• MSCI is seeking input from investors on technical issues related to the A-share market:
  • Trading suspensions
  • Alignment of international settlement cycles
  • Access to hedging and derivatives vehicles

Figures and Data

• Figure 1: Three key areas in the latest consultation
• Figure 2: Top 20 stocks to benefit from the inclusion factor increase
• Figure 3: 14 ChiNext stocks potentially added to the index
• Figure 4: A-share weighting increase in MSCI Emerging Markets Index
• Figure 5: Weighting change of various China equity classes
• Figure 6: Long-term A-share weighting if inclusion factor increases to 100%
• Figure 7a & 7b: Lists of stocks in the MSCI China A Inclusion Index

Summary of Key Information

• MSCI is proposing a significant increase in the inclusion factor for large-cap A-shares, which could result in substantial fund inflows.
• The inclusion of ChiNext stocks is expected to diversify the index and attract more international investors.
• The addition of mid-cap A-shares in 2020 will further expand the index.
• There may be a reallocation of fund weights from other China equity classes to A-shares, potentially leading to outflows from H-shares and other classes.
• The consultation process is ongoing, with a deadline of February 15, 2019, and a decision expected by February 28, 2019.