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

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Event-Driven

Haidilao International Holding / Event-Driven

The Hang Seng Indexes Company Limited (HSIL) should announce the results of the 2020 Q3 review of the Hang Seng Family of Indexes on 6 November. The constituent changes will be effective after the close of trading on 4 December.With only 3 changes permitted in the September <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> review post the methodology change that included WVR securities and Secondary Listings in the eligible Universe, there could be as many as 9 changes in the December review.We see a high probability of <a href="https://www.smartkarma.com/entities/china-overseas-land-invest" target="_blank" data-smartkarma-citation="entities:419:1" rel="noopener">China Overseas Land &amp; Investment Ltd (688 HK)</a>, <a href="https://www.smartkarma.com/entities/jd-com-inc" target="_blank" data-smartkarma-citation="entities:29043:1" rel="noopener">JD.com (HK) (9618 HK)</a>, <a href="https://www.smartkarma.com/entities/alibaba-health-information-technology-ltd" target="_blank" data-smartkarma-citation="entities:453:1" rel="noopener">Alibaba Health Information Technology (241 HK)</a>, <a href="https://www.smartkarma.com/entities/haidilao-international-holding-ltd" target="_blank" data-smartkarma-citation="entities:27044:1" rel="noopener">Haidilao (6862 HK)</a>, <a href="https://www.smartkarma.com/entities/china-feihe-ltd" target="_blank" data-smartkarma-citation="entities:24413:1" rel="noopener">China Feihe (6186 HK)</a>, <a href="https://www.smartkarma.com/entities/semiconductor-manufacturing" target="_blank" data-smartkarma-citation="entities:14231:1" rel="noopener">Semiconductor Manufacturing (981 HK)</a> and <a href="https://www.smartkarma.com/entities/evergrande-real-estate-group-limited" target="_blank" data-smartkarma-citation="entities:479:1" rel="noopener">Evergrande Real Estate Group (3333 HK)</a> being 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>, and of <a href="https://www.smartkarma.com/entities/china-taiping-insurance-hldgs-co-ltd" target="_blank" data-smartkarma-citation="entities:489:1" rel="noopener">China Taiping Insurance Hldgs (966 HK)</a>, <a href="https://www.smartkarma.com/entities/china-telecom-corp-ltd-h" target="_blank" data-smartkarma-citation="entities:1015:1" rel="noopener">China Telecom Corp Ltd (H) (728 HK)</a>, <a href="https://www.smartkarma.com/entities/china-minsheng-banking-h" target="_blank" data-smartkarma-citation="entities:8983:1" rel="noopener">China Minsheng Banking H (1988 HK)</a>, <a href="https://www.smartkarma.com/entities/china-vanke-co-ltd-h" target="_blank" data-smartkarma-citation="entities:18368:1" rel="noopener">China Vanke Co Ltd (H) (2202 HK)</a>, <a href="https://www.smartkarma.com/entities/fosun-international-ltd" target="_blank" data-smartkarma-citation="entities:433:1" rel="noopener">Fosun International (656 HK)</a>, <a href="https://www.smartkarma.com/entities/china-citic-bank-corp-ltd-ea6c25fd-4b20-45cb-a4a6-df7a60136f03" target="_blank" data-smartkarma-citation="entities:653:1" rel="noopener">China Citic Bank Corp Ltd H (998 HK)</a> and <a href="https://www.smartkarma.com/entities/china-shenhua-energy-co-h" target="_blank" data-smartkarma-citation="entities:382:1" rel="noopener">China Shenhua Energy Co H (1088 HK)</a> being deleted from the index.Depending on price movements between now and 30 September, <a href="https://www.smartkarma.com/entities/netease" target="_blank" data-smartkarma-citation="entities:29030:1" rel="noopener">NetEase (9999 HK)</a> and <a href="https://www.smartkarma.com/entities/hansoh-pharmaceutical-group" target="_blank" data-smartkarma-citation="entities:23675:1" rel="noopener">Hansoh Pharmaceutical (3692 HK)</a> could be included in the index, which would see <a href="https://www.smartkarma.com/entities/want-want-china-holdings-ltd" target="_blank" data-smartkarma-citation="entities:355:1" rel="noopener">Want Want (151 HK)</a> and <a href="https://www.smartkarma.com/entities/picc-property-casualty-h" target="_blank" data-smartkarma-citation="entities:350:1" rel="noopener">PICC Property &amp; Casualty H (2328 HK)</a> being deleted.Estimated one-way turnover for the rebalance is 9.63% which is lower than the turnover at the September rebalance, but significant nonetheless.The expected review changes will alter the sectoral composition of the index with an increase in the weight of the Consumer Discretionary, Information Technology and Health Care sectors at the expense of Financials and Energy. There will also be an impact on the HSCEI 2021 dividend futures, a large part of which has already been discounted by the market.

The Hang Seng Indexes Company Limited (HSIL) should announce the results of the 2020 Q3 review of the Hang Seng Family of Indexes on 6 November. The constituent changes will be effective after the close of trading on 4 December.With only 3 changes permitted in the September Hang Seng China Enterprises Index (HSCEI INDEX) review post the methodology change that included WVR securities and Secondary Listings in the eligible Universe, there could be as many as 9 changes in the December review.We see a high probability of China Overseas Land &amp; Investment Ltd (688 HK), JD.com (HK) (9618 HK), Alibaba Health Information Technology (241 HK), Haidilao (6862 HK), China Feihe (6186 HK), Semiconductor Manufacturing (981 HK) and Evergrande Real Estate Group (3333 HK) being included in the Hang Seng China Enterprises Index (HSCEI INDEX), and of China Taiping Insurance Hldgs (966 HK), China Telecom Corp Ltd (H) (728 HK), China Minsheng Banking H (1988 HK), China Vanke Co Ltd (H) (2202 HK), Fosun International (656 HK), China Citic Bank Corp Ltd H (998 HK) and China Shenhua Energy Co H (1088 HK) being deleted from the index.Depending on price movements between now and 30 September, NetEase (9999 HK) and Hansoh Pharmaceutical (3692 HK) could be included in the index, which would see Want Want (151 HK) and PICC Property &amp; Casualty H (2328 HK) being deleted.Estimated one-way turnover for the rebalance is 9.63% which is lower than the turnover at the September rebalance, but significant nonetheless.The expected review changes will alter the sectoral composition of the index with an increase in the weight of the Consumer Discretionary, Information Technology and Health Care sectors at the expense of Financials and Energy. There will also be an impact on the HSCEI 2021 dividend futures, a large part of which has already been discounted by the market.

HSCEI Index Rebalance Preview - December 2020: HUGE Number of Changes and Turnover Expected

Hang Seng China Enterprises Index / Event-Driven

With everything almost done and dusted on the HSCEI 2020 dividend futures, the focus has shifted firmly to the HSCEI dividend futures contract expiring in 2021.The HSCEI 2021 dividend futures contract has dropped from a high of almost 500 index points in May 2018 and 400 index points in January 2020 to just 278 index points now. The change is mostly driven by Hang Seng Indexes' decision to include WVR securities and Secondary Listings 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>, and with COVID-19 contributing to a sharp drop in company earnings.The HSCEI 2021 dividend futures are trading near our fair value at the moment. However, there are still many more catalysts that will keep things interesting for the next few months. Further changes in the index composition and the capping applied to WVR securities and Secondary Listings, pressure on megabanks to support the real economy at the expense of profits and shareholder return, and companies that have never paid dividends starting to pay are just some of them.We discuss all this in more detail below.

With everything almost done and dusted on the HSCEI 2020 dividend futures, the focus has shifted firmly to the HSCEI dividend futures contract expiring in 2021.The HSCEI 2021 dividend futures contract has dropped from a high of almost 500 index points in May 2018 and 400 index points in January 2020 to just 278 index points now. The change is mostly driven by Hang Seng Indexes' decision to include WVR securities and Secondary Listings in the Hang Seng China Enterprises Index (HSCEI INDEX), and with COVID-19 contributing to a sharp drop in company earnings.The HSCEI 2021 dividend futures are trading near our fair value at the moment. However, there are still many more catalysts that will keep things interesting for the next few months. Further changes in the index composition and the capping applied to WVR securities and Secondary Listings, pressure on megabanks to support the real economy at the expense of profits and shareholder return, and companies that have never paid dividends starting to pay are just some of them.We discuss all this in more detail below.

HSCEI Dividends: Multiple Catalysts to Drive Fair Value Changes

The Hang Seng Indexes Company Limited (HSIL) announced the results of its review of the Hang Seng Family of Indexes post market close on 14 August. The constituent changes will be effective from 7 September 2020 and the rebalancing trades will need to be done at the closing auction on 4 September 2020.For 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>, there are 3 additions: <a href="https://www.smartkarma.com/entities/xiaomi-corp" target="_blank" data-smartkarma-citation="entities:24409:1" rel="noopener">Xiaomi Corp (1810 HK)</a>, <a href="https://www.smartkarma.com/entities/meituan-dianping" target="_blank" data-smartkarma-citation="entities:26970:1" rel="noopener">Meituan Dianping (3690 HK)</a> and <a href="https://www.smartkarma.com/entities/alibaba-group" target="_blank" data-smartkarma-citation="entities:28434:1" rel="noopener">Alibaba Group (9988 HK)</a>, and 3 deletions: <a href="https://www.smartkarma.com/entities/sinopharm-group-co-ltd-h" target="_blank" data-smartkarma-citation="entities:32:1" rel="noopener">Sinopharm Group Co Ltd H (1099 HK)</a>, <a href="https://www.smartkarma.com/entities/byd-co-ltd-h" target="_blank" data-smartkarma-citation="entities:20962:1" rel="noopener">BYD (1211 HK)</a> and <a href="https://www.smartkarma.com/entities/citic-securities-h" target="_blank" data-smartkarma-citation="entities:463:1" rel="noopener">Citic Securities (H) (6030 HK)</a>.We had expected all changes, so there are no surprises here. However, <a href="https://www.smartkarma.com/entities/xiaomi-corp" target="_blank" data-smartkarma-citation="entities:24409:1" rel="noopener">Xiaomi Corp (1810 HK)</a> should react positively to its 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> while <a href="https://www.smartkarma.com/entities/meituan-dianping" target="_blank" data-smartkarma-citation="entities:26970:1" rel="noopener">Meituan Dianping (3690 HK)</a> could react negatively on its non-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>.Turnover is estimated at 14.79% and there is no stock that has more than 2 days of ADV to buy or sell. There are quite a few names that will have more than 1 day of ADV to sell as part of the funding trade.

The Hang Seng Indexes Company Limited (HSIL) announced the results of its review of the Hang Seng Family of Indexes post market close on 14 August. The constituent changes will be effective from 7 September 2020 and the rebalancing trades will need to be done at the closing auction on 4 September 2020.For the Hang Seng China Enterprises Index (HSCEI INDEX), there are 3 additions: Xiaomi Corp (1810 HK), Meituan Dianping (3690 HK) and Alibaba Group (9988 HK), and 3 deletions: Sinopharm Group Co Ltd H (1099 HK), BYD (1211 HK) and Citic Securities (H) (6030 HK).We had expected all changes, so there are no surprises here. However, Xiaomi Corp (1810 HK) should react positively to its inclusion in the Hong Kong Hang Seng Index (HSI INDEX) while Meituan Dianping (3690 HK) could react negatively on its non-inclusion in the Hong Kong Hang Seng Index (HSI INDEX).Turnover is estimated at 14.79% and there is no stock that has more than 2 days of ADV to buy or sell. There are quite a few names that will have more than 1 day of ADV to sell as part of the funding trade.

HSCEI Index Rebalance - Huge Turnover as WVRs & Secondary Listings Make Their Index Debut

The 2021 HSCEI dividend futures have been on a roller coaster ride since January this year when the HSIL published a consultation paper on the inclusion eligibility of WVR securities and secondary listings 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>.The spread between the 2020/21 dividend futures dropped from -10 to -110 and is currently trading at -74 using mid-market prices.We see a much higher probability of the 2020/21 dividend spread dropping towards its earlier lows due to:<ul>
<li>The HSIL decision to allow WVR securities and secondary listings in the index and the removal of extra eligibility criteria on P-chips and Red chips that will result in a LOT of changes to the index constituents in the September and December reviews where the expected inclusions have a much higher weight and much lower dividend yield as compared to the expected exclusions;</li>
<li>The potential index inclusion of new large cap listings in Hong Kong like <a href="https://www.smartkarma.com/entities/ant-financial-services-group" target="_blank" data-smartkarma-citation="entities:24240:1" rel="noopener">Ant Financial (1051260D CH)</a> and secondary listings of Chinese companies listed in the US where the dividend yield will be lower than that on the excluded stocks;</li>
<li>Possible increase in the index weight cap on WVR securities and secondary listings from 5% to 10% next year;</li>
<li>Possible cuts to bank dividends following the Government asking them to 'sacrifice' profits to bolster their balance sheets and lend to SMEs;</li>
<li>Company results - companies will start announcing interim results in the next few weeks and the impact of the Coronavirus on their revenues/profits will be known.</li>
</ul>The risks to this thesis are:<ul>
<li>Stocks that have never paid dividends start to pay dividends in 2021. Looking at you, <a href="https://www.smartkarma.com/entities/alibaba-group" target="_blank" data-smartkarma-citation="entities:28434:1" rel="noopener">Alibaba Group (9988 HK)</a> </li>
<li>Possible special dividends from <a href="https://www.smartkarma.com/entities/petrochina-co-ltd-h" target="_blank" data-smartkarma-citation="entities:262:1" rel="noopener">Petrochina Co Ltd H (857 HK)</a> and <a href="https://www.smartkarma.com/entities/china-petroleum-chemical-h" target="_blank" data-smartkarma-citation="entities:369:1" rel="noopener">China Petroleum &amp; Chemical (386 HK)</a> following the sale of their pipeline assets to Pipe China</li>
<li>Company results that are better than last year even with the coronavirus pandemic raging and global trade sharply lower than last year.</li>
</ul>

The 2021 HSCEI dividend futures have been on a roller coaster ride since January this year when the HSIL published a consultation paper on the inclusion eligibility of WVR securities and secondary listings in the Hang Seng China Enterprises Index (HSCEI INDEX).The spread between the 2020/21 dividend futures dropped from -10 to -110 and is currently trading at -74 using mid-market prices.We see a much higher probability of the 2020/21 dividend spread dropping towards its earlier lows due to:
The HSIL decision to allow WVR securities and secondary listings in the index and the removal of extra eligibility criteria on P-chips and Red chips that will result in a LOT of changes to the index constituents in the September and December reviews where the expected inclusions have a much higher weight and much lower dividend yield as compared to the expected exclusions;
The potential index inclusion of new large cap listings in Hong Kong like Ant Financial (1051260D CH) and secondary listings of Chinese companies listed in the US where the dividend yield will be lower than that on the excluded stocks;
Possible increase in the index weight cap on WVR securities and secondary listings from 5% to 10% next year;
Possible cuts to bank dividends following the Government asking them to 'sacrifice' profits to bolster their balance sheets and lend to SMEs;
Company results - companies will start announcing interim results in the next few weeks and the impact of the Coronavirus on their revenues/profits will be known.
The risks to this thesis are:
Stocks that have never paid dividends start to pay dividends in 2021. Looking at you, Alibaba Group (9988 HK) 
Possible special dividends from Petrochina Co Ltd H (857 HK) and China Petroleum &amp; Chemical (386 HK) following the sale of their pipeline assets to Pipe China
Company results that are better than last year even with the coronavirus pandemic raging and global trade sharply lower than last year.


China and US Equity Analyst

Roger Xie

Equity Bottom-Up

China’s top securities regulator is encouraging mergers and acquisitions among brokerages and mutual fund houses, the state-run China Securities Journal reported last week. The China Securities Regulatory Commission (CSRC) aims to solve the problem of competition among industry peers with the move, and the top securities watchdog also supports launching employee stock ownership and equity incentive plans. We believe it is policy maker's intention to have a more institutionalized and internationalized industry, which will better serve China economic transformation. Based on valuation and favorite policy, brokerage and asset managers are in sweet spot for investors. According to Securities Association of China, there are 98 licensed brokerage firms in China. In 2019, the top-10 brokerage firms' revenue only account 46% of industry-wide revenue. Their relevant profits account about 60% of industry-wide profit. Interestingly, top-10 brokerage firms in US account more than 70% of revenue and profit for the industry. We believe there are plenty of room for further consolidation in brokerage business. It is also reported in April that <a href="https://www.smartkarma.com/entities/citic-securities-h" target="_blank" data-smartkarma-citation="entities:463:1" rel="noopener">Citic Securities (H) (6030 HK)</a> and <a href="https://www.smartkarma.com/entities/csc-financial" target="_blank" data-smartkarma-citation="entities:23710:1" rel="noopener">CSC Financial (6066 HK)</a>, along with their major shareholders CITIC Group and Central Huijin, have started due diligence and a feasibility study on a potential merger of these two brokers. If the speculation has been realized, the combined CITICS and CSC Financial will become the largest brokerage firm in China with asset exceeding RMB 1trn. It will become No. 1 player in brokerage, margin financing, investment banking and asset management.<a href="https://www.smartkarma.com/entities/csc-financial" target="_blank" data-smartkarma-citation="entities:23710:1" rel="noopener">CSC Financial (6066 HK)</a> is our top pick in Chinese broker sector. CSC Financial was ranked 4th by equity and bond underwriting ranking. It has a dominant position on the IPO underwriting volume and pipeline in ChiNext board, which has direct benefits from the ChiNext board reform.

China’s top securities regulator is encouraging mergers and acquisitions among brokerages and mutual fund houses, the state-run China Securities Journal reported last week. The China Securities Regulatory Commission (CSRC) aims to solve the problem of competition among industry peers with the move, and the top securities watchdog also supports launching employee stock ownership and equity incentive plans. We believe it is policy maker's intention to have a more institutionalized and internationalized industry, which will better serve China economic transformation. Based on valuation and favorite policy, brokerage and asset managers are in sweet spot for investors. According to Securities Association of China, there are 98 licensed brokerage firms in China. In 2019, the top-10 brokerage firms' revenue only account 46% of industry-wide revenue. Their relevant profits account about 60% of industry-wide profit. Interestingly, top-10 brokerage firms in US account more than 70% of revenue and profit for the industry. We believe there are plenty of room for further consolidation in brokerage business. It is also reported in April that Citic Securities (H) (6030 HK) and CSC Financial (6066 HK), along with their major shareholders CITIC Group and Central Huijin, have started due diligence and a feasibility study on a potential merger of these two brokers. If the speculation has been realized, the combined CITICS and CSC Financial will become the largest brokerage firm in China with asset exceeding RMB 1trn. It will become No. 1 player in brokerage, margin financing, investment banking and asset management.CSC Financial (6066 HK) is our top pick in Chinese broker sector. CSC Financial was ranked 4th by equity and bond underwriting ranking. It has a dominant position on the IPO underwriting volume and pipeline in ChiNext board, which has direct benefits from the ChiNext board reform. 

China Brokers: Regulator Encourages M&A Among Brokers and Mutual Fund Houses

China

CITIC Securities Co., Ltd. provides securities brokerage, trading, underwriting, investment banking, asset management, and investment consulting services.

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Citic Securities (H) (6030 HK)

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