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Hong Kong's key index compiler opens the door for China's technology behemoths to join Hang Seng stock benchmark

Enoch Yiuenoch.yiu@scmp.com

Hang Seng Indexes Company, responsible for compiling the benchmark stock index in Asia's third-largest stock market, is taking public feedback on what could become the biggest revamp in its 36-year history.

The company is weighing the feasibility of allowing companies with weighted voting rights (WVR) such as the Chinese smartphone maker Xiaomi, and secondary listings such as the technology behemoth Alibaba Group Holding, to be included in the Hang Seng Index benchmark, according to a consultation paper released on its website on Monday. It is also considering capping the weighting of the financial sectors in the key gauge.

The consultation process will end on March 13, it said. The result may be announced in May, the index compiler said.

The move may be a precursor to the inclusion of Chinese technology companies like Alibaba Group Holding, Meituan Dianping and Xiaomi Corporation, which adopted a WVR-style capital structure that has split the investment community as either being too good to ignore or too risky for general investors.

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The three companies together commanded almost HK$5.3 trillion (US$679 billion) in market value at the end of 2019, or about 56 per cent of the current market capitalisation of Hang Seng Index's 50 constituent members.

"There is a diverse range of market views over the index eligibility of weighted voting rights," the HSI paper said. "As these entities are usually large technology-related mainland companies with global business interests, advocates see them as an excellent investment opportunity that is too good to ignore.

"Further, from the perspective of market representation, it seems inappropriate to exclude these large-cap companies from key benchmark indexes.

"On the other hand, opponents have raised concerns about the unequal voting right structure of WVRs, which might disadvantage general shareholders given the superior voting rights of certain 'minority' shareholders."

The index compiler is also seeking opinions on the eligibility of companies with secondary listing status in Hong Kong, since the stock exchange regulator introduced a concessionary route in its listing rules to enable companies like Alibaba Group Holding to list in the city.

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Alibaba, owner of the South China Morning Post, was listed in November last year. It was preceded by Uniqlo store operator Fast Retailing Company of Japan, Canadian miner SouthGobi Resources and insurer Manulife.

At present, only primary listing companies can be constituent stocks.

Traditionally, many of the secondary listing companies have low turnover. However, Alibaba's secondary listing has attracted average daily turnover of HK$2.496 billion a day, making it one of the most traded stocks.

HSI Company expected more US-listed tech stocks may follow in the footsteps of Alibaba with a secondary listing here.

"Hang Seng Index represents the Hong Kong stock market. If a company has a big market cap and is actively traded in the Hong Kong market, they should be included in the index or otherwise the index cannot represent the local market in full," said Clement Chan Kam-wing, managing director of accounting firm BOD.

"However, there are concerns from the passive fund managers that dual-class shareholding companies do not follow the one share, one vote principle. The index compiler will need to consider the corporate governance and shareholder protection angle."

On the financials sector weighting, the compiler said the industry has dominated the benchmark for some time, with 11 finance stocks accounting for 48.3 per cent of the aggregate weighting in the main index and 34 per cent of the broader Hang Seng Composite Index.

Although the compiler company is only 36 years old, the Hang Seng Index itself was established half a century ago.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2020 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2020. South China Morning Post Publishers Ltd. All rights reserved.