Stock Connect List Adjustments: What Listed Companies Must Do Now!

On March 4th, as the changes in the Hang Seng Composite Index constituents took effect, the corresponding adjustments to the Hong Kong Stock Connect list also became effective on the same day. According to announcements from the Shanghai and Shenzhen Stock Exchanges, 22 targets including Shandong Hi-Speed Holdings and REPT BATTERO were added to the Stock Connect list, while 27 stocks such as Shangri-La(Asia) and Hutchison Telecommunications Hong Kong were removed from the list.

The adjustment of the Hong Kong Stock Connect had a significant impact on some stocks on March 4th, with substantial intraday price volatility. For instance, Cifi Holdings surged by more than 30%, and Shimao Group by over 25%, ending the day with gains of 8.96% and 3.85%, respectively. On the exclusion side, DIFFER GROUP AUTO's stock price fell by more than 40%, and Flowing Cloud Technology by over 30%, indicating a significant short-term impact.

In the long run, the inflow and outflow of northbound capital, influenced by the Hong Kong Stock Connect eligibility, can affect the liquidity of listed companies. For example, last year during the period from March 13th (when the adjustments took effect) to June 30th (the next review date), the 33 stocks that were included in the Hong Kong Stock Connect saw an average increase of 15% in their trading volume compared to the full year of 2022. In contrast, the 20 excluded stocks experienced a 42% contraction in their average trading volume during the same period, demonstrating a significant difference in liquidity performance between the two groups.

How Should Listed Companies Respond to Inclusion in or Exclusion from the Hong Kong Stock Connect List?

The profound impact of the Hong Kong Stock Connect eligibility on a company's capital market performance stems from the fact that inclusion signifies access to capital from northbound investors. Conversely, exclusion means that Mainland investors can only sell the stock unidirectionally and are barred from making further purchases. If a company with a high proportion in Hong Kong Stock Connect is forced to exit the program—often involving institutional and major shareholders, mutual funds and index funds will have to adjust their positions, leading to short-term selling pressure on the company's stock. If new investors are not introduced timely, the company's share price may be further pressured.

After being included in the Hong Kong Stock Connect, a listed company gains increased market exposure, attracting the investors, especially institutional investors, which is positively meaningful for enhancing market capitalization and optimizing equity structure. Furthermore, benifitted from the continuous optimization of the interconnection mechanisms between Mainland China and Hong Kong, it is expected to bring more incremental capital to companies in the Hong Kong Stock Connect, thereby intensifying the market differentiation between "included targets" and "excluded targets."

For companies that are included in the Hong Kong Stock Connect, it is important to combine post-earnings release investor roadshows with multi-channel communication to concentrate the dissemination of positive news to the capital markets and investors, which is significant for enhancing and managing corporate value.

As the effective date of the adjustments to the Hang Seng Composite Index and the Hong Kong Stock Connect nears the earnings season of listed companies, those being excluded cannot convey confidence to the market and investors through share repurchases to support the stock price (except for companies exempted from the "automatic buy-back" clause), inevitably facing certain pressure on the stock price in the short term. At this time, it is even more crucial for the listed company's Investor Relations to strengthen connections with core shareholders and institutional investors, emphasizing the company's industry advantages during earnings presentations, boosting investor confidence, and preventing further fluctuations in the share price.

What Are the Rules and Criteria for Inclusion in the Hong Kong Stock Connect?

According to the China Securities Regulatory Commission's "Announcement on the Expansion of the Mutual Market Access Scope", companies that meet the criteria for inclusion in the Hang Seng Composite Index will have the opportunity to be included in the Hong Kong Stock Connect. Therefore, for a Hong Kong-listed company to become part of the Hong Kong Stock Connect, it must first become a constituent of the Hang Seng Composite Index.

In general, reviews of the Hang Seng Composite Index focus on two key indicators of listed companies: "market capitalization" and "liquidity." Regarding market capitalization, the threshold for companies included in the recent review of the Hang Seng Composite Index is around 6.5 billion Hong Kong dollars, a nearly 10% decrease from the previous threshold of over 7 billion prior to 2022. Influenced by the global economy and the overall performance of Hong Kong stocks, the index has maintained a lower threshold for inclusion in 2023, offering significant opportunities for companies with market capitalizations between 6.5 and 7 billion Hong Kong dollars.

Beyond market capitalization, liquidity is another crucial indicator for the Hang Seng Composite Index. In past reviews, there have been instances where companies with tens of billions in valuation were temporarily removed from the index due to liquidity issues. Therefore, companies aspiring to join the Hang Seng Composite Index need to adequately address both of these indicators.

The Hang Seng Composite Index and the Hong Kong Stock Connect have broadened the perspectives on capital operations and investor management. Listed companies can enhance investor relations and leverage policies to gain more market recognition. In the realm of investor communications, Futu I&E has comprehensively upgraded its IR services, evolving from a traffic distribution-focused model to a one-stop service model encompassing "planning, content, traffic, and service". By integrating communication and roadshow research scenarios, Futu I&E can effectively facilitate corporate-investor communications.

For instance, Futu I&E can provide customized integrated communication service solutions tailored to the specific needs of companies, meeting diverse capital market communication and investor relations maintenance requirements. This ensures that investors can fully understand the positive impact of inclusion in the Hang Seng Composite Index and the Hong Kong Stock Connect on the company. In addition, Futu I&E can match the most suitable participants for corporate roadshows and offer 1v1 precise invitations to individual/institutional investors, industry experts, and media, both within and outside its platform. This comprehensive communication aims to achieve value recognition and assist companies in effective market capitalization management.

Disclaimer: The content of this article is for reference only and does not constitute financial, legal, tax, investment advice, or any other form of advice. It should not be relied upon as the sole basis for making any financial, tax, or legal decisions. Any consequences resulting from actions taken based on the information and opinions expressed in this article are the sole responsibility of the individual taking such actions and are not related to Futu I&E.