Blue-chip universe gets more depth and breadth

money-glitz | 18 Jan 2021

Up to 28 companies will join the blue-chip index as a part of the Hang Seng Index Company's effort to compete with its international counterparts like MSCI and FTSE Russell, providing buying opportunities for investors who bet on index inclusion.

The local index compiler said last month it is considering increasing the number of Hang Seng Index members to between 65 and 80, from the current 52, according to a consultation paper. That came nine years after it expanded the benchmark's coverage to 50 from 38 stocks to cover nearly 60 percent of the total market cap of Hong Kong equities.

Hang Seng Index has lagged behind its international rivals, as it failed to capture the rise of China's tech giants and continued to be dragged down by heavyweight old-economy sectors, including financial and local property firms.

The Hang Seng Index Company said it will maintain a certain number of constituents classified as Hong Kong companies. Meanwhile, it plans to remove the minimum listing time requirement, to attract more sizable companies, especially US-listed Chinese companies. The public consultation is scheduled to end this month, and Hang Seng Index Company proposed to implement changes within a year.

The index provider plans to select new blue-chip companies from six groups after consolidating 12 industries. Given the current market capitalization and turnover, "IT & industrials," "healthcare," "consumption" and "property and construction," sectors appear to be the major winners.

The Hang Seng Index Company is expected to increase by three to four companies in the "IT & industrials" sector, according to its simulated portfolios. With leading market capitalization and turnover, e-commerce firm (9618) and mobile games developer Netease (9999), which finished homecoming listings last year, are most likely to join the benchmark.

State-owned chipmaker Semiconductor Manufacturing International (0981), software developers Kingdee International Software (0268) and Ming Yuan Cloud (0909), as well as handset components maker BYD Electronic International (0285), are competing for the rest of one to two positions. Two Chinese top short-video platforms - Tencent (0700)-backed Kuaishou Technology and ByteDance's Douyin - are reportedly seeking Hong Kong initial public offerings this year, with mega valuations of HK$390 billion and HK$1.4 trillion, respectively. They may become the first new listing to take advantage of the fast entry rule.

The Hang Seng Index Company divided the "consumption" group into "consumer discretionary" and "consumer staples."

The index provider is projected to add one to two companies from the "consumer staples''. Bottled water giant Nongfu Spring (9633), chaired by Asia's wealthiest person Zhong Shanshan, has the highest chance to be included, as its fourth-quarter turnover of nearly HK$20 billion surpassed many blue-chip stocks. China Feihe (6186), the country's largest infant milk maker, and former blue-chip China Resources Beer (0291) are also frontrunners.

Hotpot chain operator Haidilao International (6862), with a market cap of HK$314.29 billion, is likely to be one among the three to seven consumer discretionary stocks to join Hang Seng Index. Other candidates include e-cigarette device maker Smoore International (6969), with a market value of HK$428.16 billion, and car maker BYD (1211), whose H-shares are worth HK$224.91 billion.

However, the outperformance of Smoore, Nongfu Spring, and Haidilao last year was largely thanks to high shareholding concentration. Founders of those companies control 70-85 percent of stakes. It is still uncertain how Hang Seng Index Company measures market liquidity issues.

In the "property & construction" sector, the index provider proposes to add two to five stocks. Mainland property developer Longfor Group (0960), which is favored by many fund managers, is likely to be one of them. Other domestic peers like Sunac China (1918) and Shimao Group (0813) also could be included.

Country Garden Services (6098) may be the first property management firm in the gauge.

Swire Properties (1972), the property arm of former blue-chip Swire Pacific (0019), with an average market cap of HK$181 billion last year, may take a seat as the Hang Seng Index Company hopes to keep Hong Kong shares.

The "Healthcare" sector is one of the biggest beneficiaries of the index reform, as there are only three pharmaceutical stocks in the benchmark. For the potential five to seven constituents, online healthcare platform JD Health International (6618) is leading the market cap ranking, followed by two rivals Alibaba Health Information Technology (0241) and Ping An Healthcare and Technology (1833).

Mainland drugmakers Hansoh Pharmaceutical (3692) and BeiGene (6160), whose shares jumped by around 50 percent last year, have advantages in terms of market value, while Innovent Biologics (1801) has an edge in terms of turnover.

In the utility industry, China Gas (0384) and ENN Energy (2688), which are held by many funds, could be included. Guangdong Investment (0270) and China Resources Gas (1193) also might be newcomers.

Meanwhile, some financial and energy stocks may leave the benchmark. State-owned Bank of Communications (3328), whose average market cap was only HK$164.6 billion last year, and oil giant PetroChina (0857) with 2020 average market value of HK$56.2 billion, maybe no longer be a blue-chip.

For the industries sector, smartphone supplier AAC Technologies (2018) may be booted from the Hang Seng Index, due to relatively low turnover and market cap, it might be replaced by Xinyi Solar (0968), renewable energy products maker, with a market cap of HK$165.26 billion.

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