Pan-Asia Index Rebalances/ Events/ Delta One, Periscope Analytics

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Event-Driven

Hang Seng China Enterprises Index / Event-Driven

As we have said many time before, the <a href="https://www.smartkarma.com/entities/hang-seng-china-enterprises-index" target="_blank" data-smartkarma-citation="entities:22900:1" rel="noopener">Hang Seng China Enterprises Index (HSCEI INDEX)</a> 2021 and 2022 dividend futures are a structural sell due to changes to the index composition that will lower the fair value of the futures.There were 18 inclusions and 17 deletions from the <a href="https://www.smartkarma.com/entities/hang-seng-china-enterprises-index" target="_blank" data-smartkarma-citation="entities:22900:1" rel="noopener">Hang Seng China Enterprises Index (HSCEI INDEX)</a> in 2020 with a shift from higher dividend yield Financials and Energy stocks to lower dividend yield stocks (or zero dividend yield stocks) from the Consumer Discretionary and Information Technology sectors.We see this trend continuing in 2021 with quite a few changes front-loaded that will affect the fair value of the HSCEI 2021 dividend futures. More changes at the back end along with potential changes to the index methodology could lower the fair value of the HSCEI 2022 dividend futures too.In this Insight, we lay out the possible changes to the index constituents and to the <a href="https://www.smartkarma.com/entities/hang-seng-china-enterprises-index" target="_blank" data-smartkarma-citation="entities:22900:1" rel="noopener">Hang Seng China Enterprises Index (HSCEI INDEX)</a> methodology that will impact the dividend futures.

As we have said many time before, the Hang Seng China Enterprises Index (HSCEI INDEX) 2021 and 2022 dividend futures are a structural sell due to changes to the index composition that will lower the fair value of the futures.There were 18 inclusions and 17 deletions from the Hang Seng China Enterprises Index (HSCEI INDEX) in 2020 with a shift from higher dividend yield Financials and Energy stocks to lower dividend yield stocks (or zero dividend yield stocks) from the Consumer Discretionary and Information Technology sectors.We see this trend continuing in 2021 with quite a few changes front-loaded that will affect the fair value of the HSCEI 2021 dividend futures. More changes at the back end along with potential changes to the index methodology could lower the fair value of the HSCEI 2022 dividend futures too.In this Insight, we lay out the possible changes to the index constituents and to the Hang Seng China Enterprises Index (HSCEI INDEX) methodology that will impact the dividend futures.

HSCEI Dividends - Structural Sell; Bank Dividends the Swing Factor

There are a lot of changes expected to the <a href="https://www.smartkarma.com/entities/hang-seng-china-enterprises-index" target="_blank" data-smartkarma-citation="entities:22900:1" rel="noopener">Hang Seng China Enterprises Index (HSCEI INDEX)</a> over the next 6 months.<a href="https://www.smartkarma.com/entities/beijing-kuaishou-technology-co-ltd" target="_blank" data-smartkarma-citation="entities:29725:1" rel="noopener">Kuaishou Technology (1024 HK)</a> lists on 5 February and we expect the stock to get Fast Entry to the index with the change implemented at the close of trading on 22 February.The Hang Seng Indexes Company Limited (HSIL) will announce the results of the March 2021 review of the Hang Seng Family of Indexes on 26 February. The constituent changes will be effective after the close of trading on 12 March. We expect 1 inclusion and 3 exclusions at the review.At the current time, we expect 3 changes at the June 2021 review. There are a few stocks that are close adds and deletes and the actual number of changes could be higher.There are a few large IPOs that could take place this year that could get those stocks Fast Entry/ regular entry into the index. The main ones are <a href="https://www.smartkarma.com/entities/didi-chuxing-inc" target="_blank" data-smartkarma-citation="entities:27467:1" rel="noopener">DiDi Chuxing (1284375D CH)</a>, JD Logistics, <a href="https://www.smartkarma.com/entities/bytedance-technology" target="_blank" data-smartkarma-citation="entities:27936:1" rel="noopener">ByteDance (1460967D CH)</a>'s Douyin and a possible revival of the shelved <a href="https://www.smartkarma.com/entities/ant-financial-services-group" target="_blank" data-smartkarma-citation="entities:24240:1" rel="noopener">Ant Group (6688 HK)</a> IPO.Then there is the possibility of some large 'homecoming' listings getting included in the <a href="https://www.smartkarma.com/entities/hang-seng-china-enterprises-index" target="_blank" data-smartkarma-citation="entities:22900:1" rel="noopener">Hang Seng China Enterprises Index (HSCEI INDEX)</a> over the next few reviews. <a href="https://www.smartkarma.com/entities/baidu-inc" target="_blank" data-smartkarma-citation="entities:179:1" rel="noopener">Baidu (BIDU US)</a> is rumored to have picked banks and is said to plan a listing in Hong Kong in the first half of the year, with <a href="https://www.smartkarma.com/entities/pinduoduo-inc" target="_blank" data-smartkarma-citation="entities:27250:1" rel="noopener">Pinduoduo (PDD US)</a> and <a href="https://www.smartkarma.com/entities/bilibili-inc" target="_blank" data-smartkarma-citation="entities:26793:1" rel="noopener">Bilibili Inc (BILI US)</a> as other names on the list.In this Insight, we lay out the potential roadmap of upcoming changes to the <a href="https://www.smartkarma.com/entities/hang-seng-china-enterprises-index" target="_blank" data-smartkarma-citation="entities:22900:1" rel="noopener">Hang Seng China Enterprises Index (HSCEI INDEX)</a> along with the impact on the stocks.

There are a lot of changes expected to the Hang Seng China Enterprises Index (HSCEI INDEX) over the next 6 months.Kuaishou Technology (1024 HK) lists on 5 February and we expect the stock to get Fast Entry to the index with the change implemented at the close of trading on 22 February.The Hang Seng Indexes Company Limited (HSIL) will announce the results of the March 2021 review of the Hang Seng Family of Indexes on 26 February. The constituent changes will be effective after the close of trading on 12 March. We expect 1 inclusion and 3 exclusions at the review.At the current time, we expect 3 changes at the June 2021 review. There are a few stocks that are close adds and deletes and the actual number of changes could be higher.There are a few large IPOs that could take place this year that could get those stocks Fast Entry/ regular entry into the index. The main ones are DiDi Chuxing (1284375D CH), JD Logistics, ByteDance (1460967D CH)'s Douyin and a possible revival of the shelved Ant Group (6688 HK) IPO.Then there is the possibility of some large 'homecoming' listings getting included in the Hang Seng China Enterprises Index (HSCEI INDEX) over the next few reviews. Baidu (BIDU US) is rumored to have picked banks and is said to plan a listing in Hong Kong in the first half of the year, with Pinduoduo (PDD US) and Bilibili Inc (BILI US) as other names on the list.In this Insight, we lay out the potential roadmap of upcoming changes to the Hang Seng China Enterprises Index (HSCEI INDEX) along with the impact on the stocks.

HSCEI Index Rebalances - The Year of the Ox and of More Change

HK/China Equity Long-Short

Osbert Tang, CFA

Equity Bottom-Up

China Conch Venture Holdings / Equity Bottom-Up

In our view, <a href="https://www.smartkarma.com/entities/china-conch-venture-holdings-ltd" target="_blank" data-smartkarma-citation="entities:19943:1" rel="noopener">China Conch Venture Holdings (586 HK)</a> is well positioned to capture the opportunities posed by both the rise in environment protection and increase in infrastructure investment in China. Its energy preservation and environmental protection business has experienced encouraging growth while through its 17.8% holding in <a href="https://www.smartkarma.com/entities/anhui-conch-cement-co-ltd" target="_blank" data-smartkarma-citation="entities:159:1" rel="noopener">Anhui Conch Cement Co Ltd H (914 HK)</a>, it can benefit from higher cement demand driven by China's escalating infrastructure investments.After posting a 30.1% YoY growth in 1H20, we expect outlook for its environmental business to stay promising due to: 1.) completion of pipeline projects, 2.) excellent capability to secure projects, 3.) good execution strength, 4.) positive margin outlook and 5.) solid financial position. At 7x PER and 1.3x P/B on a 12-month forward basis, we see Conch Venture inexpensive. Its average annual ROE of 20.8% for the next three years also affirms that valuations are attractive.

In our view, China Conch Venture Holdings (586 HK) is well positioned to capture the opportunities posed by both the rise in environment protection and increase in infrastructure investment in China. Its energy preservation and environmental protection business has experienced encouraging growth while through its 17.8% holding in Anhui Conch Cement Co Ltd H (914 HK), it can benefit from higher cement demand driven by China's escalating infrastructure investments.After posting a 30.1% YoY growth in 1H20, we expect outlook for its environmental business to stay promising due to: 1.) completion of pipeline projects, 2.) excellent capability to secure projects, 3.) good execution strength, 4.) positive margin outlook and 5.) solid financial position. At 7x PER and 1.3x P/B on a 12-month forward basis, we see Conch Venture inexpensive. Its average annual ROE of 20.8% for the next three years also affirms that valuations are attractive.

Conch Venture (586 HK): The Best of Both Worlds

Canvest Environmental Protection Group / Equity Bottom-Up

<a href="https://www.smartkarma.com/entities/canvest-environmental-protection-group-co-ltd" target="_blank" data-smartkarma-citation="entities:100:1" rel="noopener">Canvest Environmental Protection Group (1381 HK)</a> generated a resilient earnings performance of 12.7% YoY growth in 1H20, despite the negative impact of COVID-19 on its BOT construction revenue. We also like the good 3pp expansion in gross margin to 33.8% amid the tough operating environment, thanks to higher project utilisation and good cost control. Over the next 12 months, Canvest will complete 9 new projects, driving a solid earnings stream. Moreover, based on outstanding pipeline, its operational waste-to-energy capacity will grow by a CAGR of 23% CAGR for 2019-2024. We consider its 7.6x 12-month forward P/E inexpensive relative to the historical range of 7.2-17.6x. While high gearing is a concern, the guidance of focusing on execution of existing projects suggests slower new project growth and this give us comfort that the balance sheet will not get too stretched further.

Canvest Environmental Protection Group (1381 HK) generated a resilient earnings performance of 12.7% YoY growth in 1H20, despite the negative impact of COVID-19 on its BOT construction revenue. We also like the good 3pp expansion in gross margin to 33.8% amid the tough operating environment, thanks to higher project utilisation and good cost control. Over the next 12 months, Canvest will complete 9 new projects, driving a solid earnings stream. Moreover, based on outstanding pipeline, its operational waste-to-energy capacity will grow by a CAGR of 23% CAGR for 2019-2024. We consider its 7.6x 12-month forward P/E inexpensive relative to the historical range of 7.2-17.6x. While high gearing is a concern, the guidance of focusing on execution of existing projects suggests slower new project growth and this give us comfort that the balance sheet will not get too stretched further.

Canvest Env (1381 HK): Positive Takeaways from Post-1H20 Result Investor Call

The Hang Seng Indexes Company Limited (HSIL) <a href="https://www.hsi.com.hk/static/uploads/contents/en/news/pressRelease/20200814T000000.pdf" target="_blank" rel="noopener">announced</a> the results of its September review of the Hang Seng Family of Indexes post market close on 14 August.Apart from the index changes that were announced, the Index Advisory Committee reviewed the innovation and new economy sectors and Hang Seng Indexes said that they would conduct a comprehensive study of the <a href="https://www.smartkarma.com/entities/hong-kong-hang-seng-index" target="_blank" data-smartkarma-citation="entities:22899:1" rel="noopener">Hong Kong Hang Seng Index (HSI INDEX)</a> on aspects relating to composition and selection of constituents, number of constituents, weighting, industry and geographical representation etc. and submit a report with its finding and recommendations to the Hang Seng Index Advisory Committee within six months. The number of constituents of the <a href="https://www.smartkarma.com/entities/hong-kong-hang-seng-index" target="_blank" data-smartkarma-citation="entities:22899:1" rel="noopener">Hong Kong Hang Seng Index (HSI INDEX)</a> may increase during this period.With large mainland China companies from the innovation and new economy sectors listing in Hong Kong and being eligible for inclusion in the <a href="https://www.smartkarma.com/entities/hong-kong-hang-seng-index" target="_blank" data-smartkarma-citation="entities:22899:1" rel="noopener">Hong Kong Hang Seng Index (HSI INDEX)</a> and <a href="https://www.smartkarma.com/entities/hang-seng-china-enterprises-index" target="_blank" data-smartkarma-citation="entities:22900:1" rel="noopener">Hang Seng China Enterprises Index (HSCEI INDEX)</a>, both indices look increasingly similar and the correlation between the indices will keep increasing.In this Insight, we look at the main indices in Hong Kong and possible changes that could be made to the <a href="https://www.smartkarma.com/entities/hong-kong-hang-seng-index" target="_blank" data-smartkarma-citation="entities:22899:1" rel="noopener">Hong Kong Hang Seng Index (HSI INDEX)</a> to ensure it represents the Hong Kong stock market and maintains its identity.

The Hang Seng Indexes Company Limited (HSIL) announced the results of its September review of the Hang Seng Family of Indexes post market close on 14 August.Apart from the index changes that were announced, the Index Advisory Committee reviewed the innovation and new economy sectors and Hang Seng Indexes said that they would conduct a comprehensive study of the Hong Kong Hang Seng Index (HSI INDEX) on aspects relating to composition and selection of constituents, number of constituents, weighting, industry and geographical representation etc. and submit a report with its finding and recommendations to the Hang Seng Index Advisory Committee within six months. The number of constituents of the Hong Kong Hang Seng Index (HSI INDEX) may increase during this period.With large mainland China companies from the innovation and new economy sectors listing in Hong Kong and being eligible for inclusion in the Hong Kong Hang Seng Index (HSI INDEX) and Hang Seng China Enterprises Index (HSCEI INDEX), both indices look increasingly similar and the correlation between the indices will keep increasing.In this Insight, we look at the main indices in Hong Kong and possible changes that could be made to the Hong Kong Hang Seng Index (HSI INDEX) to ensure it represents the Hong Kong stock market and maintains its identity.

Hang Seng Index - Possible Changes in Upcoming Reviews

China

China Conch Venture Holdings Limited operates as an investment holding company. The Company, through its subsidiaries, provides energy preservation and environmental protection solutions and offers environment-friendly building materials.

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China Conch Venture Holdings (586 HK)

HSCEI Dividends - Structural Sell; Bank Dividends the Swing Factor

We see downside in the HSCEI 2021 and 2022 div futures due to changes in the index composition and potential changes in the index methodology....

Brian Freitas

HSCEI Index Rebalances - The Year of the Ox and of More Change

There will be a lot of changes to the HSCEI this year that will impact the sectoral composition and open up trading opportunities on the stocks and...

Brian Freitas

Conch Venture (586 HK): The Best of Both Worlds

China Conch Venture Holdings (586 HK)

Osbert Tang, CFA

Canvest Env (1381 HK): Positive Takeaways from Post-1H20 Result Investor Call

Canvest Environmental Protection Group (1381 HK) generated a resilient earnings performance of 12.7% YoY growth in 1H20, despite the negative...

Osbert Tang, CFA

Hang Seng Index - Possible Changes in Upcoming Reviews

The Hang Seng Indexes Company Limited (HSIL) announced the results of its September review of the Hang Seng Family of Indexes post market close on...

Brian Freitas

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