Investor excitement bubbled over in Hong Kong’s stock market last month with the explosive introduction of Kuaishou, the Chinese short-video app. In the biggest internet IPO since Uber went public two years ago, Kuaishou saw its shares nearly triple on the first day of trading (see WiC527). Yet activity on the Hang Seng Index (HSI), the city’s blue-chip benchmark, has been more subdued over the last 12 months. In response HSI bosses have just announced the biggest shake-up for the index in decades.
Launched publicly in 1969, the HSI is the main indicator of performance on the Hong Kong bourse. It sailed past the 30,000-point level in January for the first time since May 2019, buoyed by buying from mainland China. But the HSI has performed poorly relative to the benchmarks of other major exchanges. One of the major complaints is that it isn’t representative enough of the wider bourse: it accounts for about half of Hong Kong’s daily trading and its share of total market capitalisation has fallen from 65% five years ago to just below 56% as of the end of January.
In an announcement on Monday the compilers of the index signalled a new direction with a commitment to growing the HSI to 80 companies by the middle of next year, up from 52 currently, with an ultimate target of 100 firms.
“The expansion is intended to ensure that the index, the benchmark of the world’s third-largest stock market, truly reflects the drastic changes in the local market, which has seen a wave of listings by big technology and pre-revenue biotechnology companies following a reform by bourse operator Hong Kong Exchanges and Clearing in April 2018,” the South China Morning Post reported.
The revamp is recognition of a glaring disconnect in which Hong Kong has welcomed some of mainland China’s biggest companies for IPOs and secondary listings over the last two years but struggled to get tracking funds more interested in its blue-chip index.
Hong Kong was the second most popular listing venue last year with deals worth $31.2 billion, compared to Nasdaq’s $51.3 billion, according to data from Refinitiv. But returns from the HSI over the same period trailed those of its peers by a distance, largely due to its overreliance on financial and property stocks, which didn’t do as well as other higher-performing sectors.
The quid pro quo is that Hong Kong firms will make up a smaller share of the shortlist in future, although regulators say they will protect the biggest of the local companies with provisions that 20-25 of them must remain in the index to maintain its local flavour.
The problem is that much of this group is made up of ‘old-timers’, with the property and financial services sectors particularly overrepresented, the Financial Times countered this week. Other commentators are predicting a fuller shift away from ‘old economy’ players that creates more space for technology, biotech and other fast-growing companies from mainland China. This should bring higher valuations and larger trading volumes.
The benchmark’s bosses will try to accelerate the trend by reducing the period for newly listed companies to qualify for the HSI to just three months from two years. That will give them the chance to fast- track the firms making the biggest IPOs into the index, which should encourage more of them to list in the city as well.
Along similar lines, the HSI will increase the caps on weightings in the index for companies that make secondary listings in Hong Kong, and for companies with unequal voting rights, which could help heavyweights like Alibaba and Meituan. However, overall weightings will be capped at 8% (down from 10%), which might restrict investment in the biggest companies on the bourse, including Tencent (which is currently close to the maximum).
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