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Transformation coming soon to lagging Hang Seng Index

Hong Kong

THE 50-year-old Hang Seng Index is poised to embrace change, and it cannot come soon enough for investors forced to put up with years of dismal underperformance.

On Monday, the compiler of the gauge is expected to announce whether companies with secondary listings and unequal voting rights will be included for the first time, namely Alibaba Group Holding.

Doing so would open the door to transforming the Hang Seng from a gauge overstuffed with banks and insurers to one that better reflects the technological dynamism of China's economy. Alibaba - one of China's most valuable companies - launched a secondary listing in Hong Kong in November.

Another potential candidate for inclusion is Meituan Dianping, China's largest food-delivery website, while is considering a secondary listing of its own in the city.

With almost US$30 billion of pension-fund assets and exchange-traded funds tracking the gauge as at December 2019, such a change could spur a flood of local share sales by US-listed firms.

About half of the total weighting of the Hang Seng Index is in financial firms, compared with about 15 per cent on average for benchmarks in Europe, the US, Japan and China. The gauge has gained 1.7 per cent a year on average in the past decade, versus 5.2 per cent for the MSCI All-Country World Index.

The process of adding the likes of Alibaba may take some time, however. "In order to reduce the one-off impact on the market, the index may propose adding the weight of Alibaba gradually," said Chi Man Wong, an analyst at China Galaxy International Financial Holdings.

Alibaba is the biggest company listed in Hong Kong by market cap and is the second most actively traded stock in the past 30 days, just after the Hang Seng Index's largest component Tencent Holdings. The index would need to delete two companies to add Alibaba and Meituan, as current rules require the number of firms on the gauge to be fixed at 50.

Component maker AAC Technologies Holdings and snack firm Want Want China Holdings are among likely candidates for deletion due to their smaller market capitalisation, according to traders. The addition would raise the Hang Seng Index's forward price-to-earnings ratio to about 12 from the current 11, making it more expensive than the Shanghai Composite Index, data showed.

Ultimately, the weight of technology and consumer discretionary sectors' could surge from the current single digits to more than 30 per cent, if all US-listed Chinese companies that match the Hang Seng's requirements list in the city and are included in the index, according to Citic Securities.

Giving greater weight to companies with unequal voting rights could raise investor concerns.

"The key issue is that weighted voting rights create an opportunity for someone to have greater influence than their economic ownership would suggest," said Gabriel Wilson-Otto, head of stewardship Asia Pacific at BNP Paribas Asset Management.

The Hang Seng Index would nevertheless benefit from luring more US-listed companies, said Cliff Zhao, the head of strategy with CCB International Securities. "More funds will be attracted to follow the index, which is a good thing for Hong Kong's stock market." BLOOMBERG

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