Hang Seng TECH Index Proposed Expansion to 50 Constituents; CATL and 19 Other Companies Poised for Inclusion

Hang Seng Indexes Company recently released proposals to revise the compilation methodology of the Hang Seng TECH Index. The revisions primarily address two situations: the continuous broadening of the composition structure of Hong Kong's technology sector, and the fact that faster-growing companies often have smaller market capitalizations.

On one hand, this revision expands the coverage of the technology industry; on the other, it increases the number of Hang Seng TECH Index constituents from the current 30 to 50. In addition to the existing market capitalization screening criteria, a new revenue growth segment will be added.

We believe that this revision plan can indeed enhance the index's growth potential and representativeness to some extent. However, given that the weight calculation method remains unchanged, the impact on the existing index weight structure is limited. Furthermore, issues such as industry cyclicality still objectively exist under the revenue growth screening criteria.

The inherent characteristics of the technology industry mean that the long-term positive performance of technology indices relies more on the continuous iteration of the index. Therefore, an inclusive IPO environment and stock selection criteria that balance stability and timeliness are essentially the institutional foundation for the long-term positive performance of technology indices.

⚫ The stock selection dimension of the revenue growth segment can indeed enhance the index's growth potential and representativeness to some extent, but the initial weighting is low and it does not account for the impact of industry cyclicality.

According to official calculations by Hang Seng Indexes Company, the total weight of the 10 constituents in the newly added revenue growth segment is only 2.4%, far lower than the 88.5% weight of existing constituents and the 9.1% weight of the 10 constituents in the newly added market capitalization segment. Therefore, from the perspective of passive funds, the net inflow scale of passive capital into the newly added constituents in the revenue growth segment is relatively limited.

On the other hand, although the inclusion of the revenue growth dimension does enhance the overall growth potential of the index to some extent, this dimension cannot eliminate the influence of certain cyclical industries. For some stocks that are essentially cyclical, they may be included in the index at the time when high revenue growth is confirmed, but their revenue growth rates may subsequently peak and decline. Moreover, considering that the mandatory performance disclosure cycle for Hong Kong stocks is semi-annual, it often takes two reporting periods (i.e., one year) to determine "high revenue growth," meaning there may still be a lag in the timing of inclusion in the index. This paradox precisely reflects the difficulty of technology investment: attempting to select technology stocks with huge potential through an objective, stable, and ex-post stock selection condition is almost an impossible task. The complex and non-linear changing characteristics of the technology industry mean that stock selection relies more on the foresight and flexibility of active investors.

On the other hand, the characteristic that "no flower stays red for a hundred days" in the technology sector means that the long-term positive performance of technology indices relies more on the continuous iteration of the index. Therefore, an inclusive IPO environment and an index compilation scheme that balances constituent stability and stock selection timeliness are essentially the institutional foundation for the long-term positive performance of technology indices.

⚫ The 80/20 divergence effect among Hang Seng TECH Index constituents will not fundamentally change, and the index expansion will have a greater impact on some active funds.

Due to the significant differences in free-float market capitalization among Hang Seng TECH Index constituents, but with an individual stock weight cap of only 8%, the index weights of stocks with larger market capitalizations are actually severely suppressed. Given that this adjustment to the index compilation methodology does not involve changes to the individual stock weight calculation method, the weight dilution brought about by the expansion has a very limited impact on large-cap stocks. Moreover, rebalancing by ETFs passively tracking Hong Kong stock indices is concentrated in the closing call auction session within the price protection range, so the shock effect on stock prices is also relatively small.

Official calculations by Hang Seng Indexes Company show that, under the current adjustment plan, the proportion of the top 10 weighted stocks may drop from the current 70.6% to 66.3%. Compared to passive funds, we believe that the index expansion will have a greater impact on some active funds, as some active funds use constituents of important indices as their stock selection pool.

⚫ If the index compilation methodology adjustment plan is approved, we expect the following 20 companies to be included in the Hang Seng TECH Index:

The market capitalization expansion segment includes CATL (3750.HK), Tianshu Intelligence (9903.HK), ASMPT (0522.HK), GDS Holdings-SW (9698.HK), AAC Technologies (2018.HK), Biren Technology (6082.HK), UBTECH (9880.HK), Kingboard Laminates (1888.HK), Smoore International (6969.HK), and FIT Hon Teng (6088.HK);

The revenue growth segment includes XtalPi Holdings (2228.HK), MicroPort MedBot-B (2252.HK), WeRide-W (0800.HK), Maxforce Holdings (2556.HK), Black Sesame Technologies (2533.HK), Dipu Technology (1384.HK), 9F Inc. (9636.HK), Innoscience (2577.HK), Hesai-W (2525.HK), and Zhonghuan New Energy (1735.HK).

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