Exclusive from Zhitong | Newly selected Hong Kong Stock Connect targets! What are the opportunities for gold mining?

Hang Seng Index Company announced today that as of June 30, 2024, the quarterly review results of the Hang Seng Index series showed no changes in the constituent stocks of the Hang Seng Index, with the number of constituent stocks remaining at 82.

The number of constituent stocks in the Hang Seng Composite Index increased from 509 to 518. All changes will be implemented after the market closes on September 6, 2024 (Friday) and will take effect from September 9, 2024 (Monday).

1. Which targets will be included in the Stock Connect?

The new stocks included in the Stock Connect are of most concern and can be judged based on the changes in the constituent stocks of the Hang Seng Composite Index.

As is well known, the Stock Connect will first include stocks from the Hang Seng Composite Index. If the stock belongs to the large-cap or mid-cap index, it will be included. If the stock belongs to the small-cap index, it will depend on the situation. If the average market value at the end of the month for 12 months is greater than or equal to HKD 5 billion, it will be included; otherwise, it will not be included.

This time, a total of 38 targets were included in the Hang Seng Composite Index, with 5 targets originally in the Stock Connect being removed: China Shipbuilding (00317), COSCO Shipping (00598), HuaDe International (01071), Zhejiang Commercial Bank (02016), and China International Marine Containers (02039). After that, there are still 33 targets. The average market value at the end of the month during the observation period (July 2023 to June 2024) for these targets is as follows:

As shown in the table above, the lowest average market value during the review period is HKD 5.71 billion for Samsonite International (02155). According to the inclusion rules of the Stock Connect, all 33 stocks mentioned above can be included in the Stock Connect after this review.

It is worth noting that in some institutional forecasts before the announcement of the review results, the highly anticipated Yingjun, Ousudan, and Weisheng Holdings did not appear in the list of the Hang Seng Composite Index this time. There are also four "dark horse" stocks that were not predicted but made it to the list, namely: COFCO Packaging, Powerlong Development, Dah Sing Bank, and China Ship Leasing.

There is also a special stock that is expected to be included in the Stock Connect in this adjustment, which is Alibaba-SW (09988).

Alibaba CFO Xu Hong revealed in a recent post-results conference that Alibaba is actively seeking to make Hong Kong its main listing venue. The shareholder meeting on August 22 will be another important moment in Alibaba's history. Once the proposal is approved, Alibaba will complete its dual primary listing in New York and Hong Kong by the end of August.

Due to the current rules for the inclusion of dual primary listed stocks in the Stock Connect, the inspection date for stocks with the same rights but different shares is the second Hong Kong trading day before the effective date of the regular adjustment of the constituent stocks of the Hang Seng Composite Index after the conversion to a primary listing (September 5). Considering that Alibaba-SW's average daily market value and total turnover in the past 183 days have far exceeded the entry conditions for companies with the same rights but different shares, if Alibaba successfully converts to a dual primary listing at the end of August, it is expected to be included in the Stock Connect in this adjustment CITIC Securities has compiled statistics on the current situation of ETFs linked to the Hong Kong Stock Connect and related indices, which is expected to bring in approximately HKD 4.03 billion in incremental passive funds.

II. Trading Excess Return Opportunities Before Effective Date

According to CITIC Securities' calculations, between the announcement date of the Hang Seng Composite Index and the effective date of the Hong Kong Stock Connect since 2019, the predicted average excess return of the included targets relative to the Hang Seng Composite Index reached 5.5%; however, in the 30 days after the effective date of the Hong Kong Stock Connect, the average excess return of the included targets significantly declined, with the excess return relative to the Hang Seng Composite Index since 2019 being only 0.2%.

During the period from the announcement date of the Hang Seng Composite Index in 2023 to the effective date of the Hong Kong Stock Connect, the average excess return of the included targets significantly dropped to 0.8%. This was mainly due to the impact of the surge in long-term U.S. bond yields in the third quarter of 2023, which led to a suppression of the valuation of growth stocks; the excess return of the included targets rose again at the beginning of 2024.

Focusing on the new stocks successfully included, it is found that before the effective date, most of them had already fully priced in the inclusion news, resulting in not significant excess benefits.

("-" represents the announcement date, which is also the effective date)

From the table above, it can be seen that during the period from announcement to effective date, stocks with an increase of over 10% include Zhenjiu Lidu, Kedi B, Edicon Holdings, and Fourth Paradigm, while stocks with a decrease of over 10% on the announcement date include Meis Health, Youbao Online, Ruipulan, and Junshengtai Medicine.

On the effective date, there was a mix of increases and decreases. Stocks with an increase of over 10% include Zhenjiu Lidu, Kebotai, Tuhu, Fourth Paradigm, Yaoming Helian, and Suteng Juchuang. Stocks with a decrease of over 10% include Beisen Holdings, Youbao Online, Junshengtai Medicine, and others.

In the week after inclusion, there were generally large fluctuations in stock prices. Stocks with an increase of over 10% include Zhenjiu Lidu, Edicon Holdings, Kebotai, Tuhu, Fourth Paradigm, Yaoming Helian, Ruipulan, and Youbixuan, among others.

Based on the historical performance mentioned above, we can summarize as follows:

(1) Considering that the overall valuation of Hong Kong stocks is currently at a historical low, with limited outflows of funds and further market downside, investors can still pay attention to timing opportunities from the announcement date of the Hang Seng Composite Index to the effective date of the Hong Kong Stock Connect.

(2) Newly included stocks and secondary stocks this time include Laopu Gold (06181), QUANTUMPH-P (02228), etc., and the performance of these stocks before the effective date is worth observing.

(3) Of course, it is also important to note that passive funds will adjust their positions on the trading day before the effective date (September 6), and stocks with relatively poor liquidity may be significantly affected by the adjustment of funds.

III. After Inclusion in the Hong Kong Stock Connect, Which Targets Are Easier to Profit From?

After analyzing the market characteristics and historical data following the inclusion in the Hong Kong Stock Connect, the research department of private equity firm Hangchang Investment found:

1. Companies with a market value of less than HKD 10 billion usually experience a significant increase in liquidity and significant excess returns after being included in the Hong Kong Stock Connect.

2. Companies with a Price-to-Book ratio of less than 5 often exhibit better market returns during the adjustment period of the Hong Kong Stock Connect.

3. Companies in the cyclical, consumer, and technology sectors often perform better during market adjustments, especially those with strong fundamentals.

Based on these characteristics, after considering market value, Price-to-Book ratio, sectors, and fundamentals, the institution recommends the following targets:

Dongyang Guangchangjiang Pharmaceutical (01558): The company is a Chinese pharmaceutical enterprise focusing on the development, production, and sales of products in the fields of antiviral, endocrine and metabolic diseases, cardiovascular diseases, etc. The company currently produces, promotes, and sells a total of 33 pharmaceutical products in China, including 11 active pharmaceutical ingredients, most of which are for internal use. The company's three main therapeutic areas are antiviral products, products for treating endocrine and metabolic diseases, and products for treating cardiovascular diseases. In the antiviral treatment field, especially in the treatment of influenza viruses, the company owns Kewei (Oseltamivir Phosphate) capsules and granules. In the field of endocrine and metabolic disease treatment, Etongshu (Benzbromarone tablets) is the company's main product used to treat high uric acid levels (hyperuricemia). In the cardiovascular disease treatment field, Oumeining (Telmisartan tablets) and Xinhaining (Amlodipine Besylate tablets) are the company's main products. The company's net profit reached 2.199 billion in 2023, an increase of 2501.24% year-on-year.

SF Same City (09699): Backed by SF Group, SF Same City is a leading third-party instant delivery service provider. SF Same City adopts a full-scenario business model, providing delivery services for all types of products and services, including same-city delivery services for businesses, same-city delivery services for consumers, and last-mile delivery services. In 2023, the company turned losses into profits, with a revenue of 12.387 billion RMB in 2023, a year-on-year growth of 21.1%. The total number of orders increased by over 30% year-on-year, with same-city delivery services/last-mile delivery services revenue of 7.387/5.00 billion RMB, a year-on-year growth of 12.8%/35.9% respectively. Analysts at CICC predict that the operating income for 2024-2026 will reach 15.3/18.6/21 billion RMB respectively, with year-on-year growth of 23.6%/21.8%/12.5%. Adjusted net profits are expected to reach 1.67/3.93/5.89 billion RMB respectively, with year-on-year changes of +156.9%/+135.7%/+50.1%.

Tianli International Holdings (01773): Tianli International is a leading K12 private education service provider in China, currently focusing on profit-making high school business. In the early stages, the company mainly focused on K9 schools. After listing in Hong Kong in 2018, leveraging nearly twenty years of educational experience and good reputation, the company has expanded to 50 schools across 16 provinces in China. During this period, relying on its excellent reputation for college entrance, the company successfully transformed to develop profit-making high schools after the implementation of the Private Education Promotion Law in 2021, achieving revenue of 2.32 billion in FY23, a year-on-year increase of 161%, surpassing the historical peak in 2020 Achieved a net profit attributable to the parent company of 330 million yuan, a year-on-year increase of 246%, reaching 92% of the level in 2020. The company's mature high school enrollment rate far exceeds the average in Sichuan Province, and is also better than the average level of ordinary high schools in Beijing and Shanghai. Coupled with the sufficient source of students from the original K9 stage, the trend of rapid increase in enrollment after the company's transformation into high schools can still continue. The company is expected to add 3-5 high schools annually, and will also accelerate the expansion of entrusted management business based on its excellent reputation in school operation. Currently, the company has signed contracts with 14 schools and more than 20 school sections, benchmarking the scale of entrusted schools of Hailiang Education which has 190 schools. The company also has broad room for expansion in the future in its asset-light entrusted management business. Analysts at Galaxy Securities predict that the company's net profit attributable to the parent company for FY24-26 will be 550 million, 810 million, and 1.1 billion respectively, with year-on-year changes of +49%, +34%, and +29%.

Dasee Group (01405), Dasee Group is the exclusive master franchisee of Domino's Pizza in mainland China, Hong Kong, and Macau. By the end of 2023, Dasee Group had 768 stores covering more than 20 cities. From 2020 to 2023, Dasee Group's operating income grew rapidly, with a CAGR of 40.3% from 2020 to 2023. The gross profit margins for 2020-2023 were 71.9%, 73.6%, 72.8%, and 72.6% respectively, and the company turned losses into profits in 2023. Backed by the world's largest pizza brand, with a strong brand background, and benefiting from strong brand power, new store openings have shown strong performance. Analysts at CMB Securities predict a net addition of 210/270/300 new stores in 2024/2025/2026.

Jiangnan Cloth (03306), as a leading Chinese designer brand, Jiangnan Cloth has a ladder-style multi-brand matrix incubation internally, leading omni-channel operational capabilities, and a large and high-stickiness member base contributing to sales continuously. The three main brands ensure the company's steady growth in performance. From FY20 to FY23, the company's revenue CAGR reached 12.9%, leading in the mid-to-high-end women's clothing sector. It has established well-known designer brands such as JNBY, CROQUIS, jnby by JNBY, and LESS, capturing the value of brand recognition and appealing to the mid-to-high-income group. In terms of profitability, the company's profit-making ability maintains a stable and positive trend. The average net profit margin attributable to the parent company from FY14 to FY23 reached 13.3%, with excellent cost control and profit margins ranking in the top tier of the industry. Operating efficiency is relatively leading among comparable companies, with inventory turnover days and accounts receivable turnover days in FY23 at 188 and 9 days respectively, significantly better than the overall level of comparable companies. With excellent profit quality, sufficient cash flow supports stable high dividends, with the average ratio of net cash flow from operating activities to net profit reaching 170% from FY20 to FY23, and the average dividend payout ratio reaching 78.3% from listing to FY17-23. Analysts at Zheshang Securities forecast that the company's net profit attributable to the parent company for FY24-26 will be 810 million, 850 million, and 940 million respectively, with year-on-year changes of +30%, +5%, and +10%