Strategy Report: HSI enhancement preview

The HSI Company will announce results of index review after market close on 26 Feb 2021. In addition to potential changes to HSI & HSCEI constituents, this review will also determine changes in HSCI constituents and in turn eligible Southbound stocks. Consultation conclusions on HSI enhancements will probably be announced too, potentially increasing the no. of HSI stocks to 80, among other changes. The enhancements may be implemented next quarter.


  • Potential new HSI constituents: We believe Haidilao (6862 HK) is the most likely to be included into the HSI, while Ali Health (241 HK) and Hanson Pharma (3692 HK) are dark horses. Although some other stocks such as JD Health (6618 HK) have larger market caps, they do not meet listing history requirement.


  • New Southbound eligible stocks: This quarterly review is also a half-yearly review on HSCI. As inclusion in HSCI is a prerequisite to become Southbound eligible stocks (except A-H dual-listed stocks), this review warrants extra attention given the strong inflows via Southbound trading YTD. We listed 20 stocks which could become eligible.


  • HSI enhancement 1: Expand industrial representation. We expect: 1) Financials’ weighting to decrease further with one or more existing constituents to be removed, and 2) IT, Consumer and Healthcare to enjoy meaningful increases in sector weighting and number of constituents.


  • Enhancement 2: Increase the number of constituents to 65-80. We expect the majority of the extra 13-28 stocks to come from non-Financial sectors, in particular IT, Consumer and Healthcare.


  • Enhancement 3: Remove the minimum listing history requirement. We believe this will undoubtedly speed up the inclusion of newly-listed mega caps, which will probably be up-and-coming tech companies.


  • Enhancement 4: Maintain a certain number of constituents classified as HK Companies. Despite this enhancement, we believe HK companies’ representation in the HSI in terms of total weighting would continue to be diluted.


  • Enhancement 5: Unify the weighting cap of individual constituent at 8%.


  • Expected Winners: 1) IT, Consumer, Healthcare sectors, which should have more stocks to be included into the HSI; 2) Alibaba (9988 HK) and Meituan (3690 HK), and future WVR / secondary-listed mega-cap, which would see their weighting raised from 5% to 8%.


  • Expected Losers: 1) Financial and Property stocks, as the weightings will be diluted more quickly, and some of the constituents may be removed from the HSI; 2) Tencent (700 HK), AIA (1299 HK), as their weighting cap will be lowered from 10% to 8%.


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