GMTEight special offer | "Entry passage" coming soon, these stocks have already started to party! Is the Hong Kong Stock Connect really a hero to pick up the pieces?

The Hang Seng Index adjustment and the inclusion of stocks in the Hong Kong Stock Connect index will be implemented after trading hours tomorrow (September 6). Due to adverse weather conditions, the Hong Kong stock market was closed today, so the adjustment of the Hang Seng Index and the Hong Kong Stock Connect will be implemented after trading hours on September 9 (next Monday). According to the announcement by Hang Seng Index Company and Hong Kong Stock Exchange on August 16, a total of 33 stocks, including ONEWO, MARKETINGFORCE, CHABAIDAO, SF INTRA-CITY, NetEase CLOUD MUSIC, SUNSHINE INS, Crystal Technology, LAOPU GOLD, HANG LUNG GROUP, will be included in the Hong Kong Stock Connect index. Historically, adjustments to the Hong Kong Stock Connect often result in significant fluctuations in stock prices, especially those stocks that were previously managed in terms of market value around the inclusion in the Hong Kong Stock Connect. After the inclusion, positive news may lead to a pullback. In addition, stocks that were previously overlooked by the media or market may have positive expectations due to the inclusion adjustment, leading to a new market trend after the inclusion. However, both of these scenarios exist, and investors need to analyze each specific situation rather than making generalizations. 1. "Inclusion" Celebration When a stock is included in the Hong Kong Stock Connect, it means it will receive incremental capital inflow, which is a major positive factor. Therefore, intuitively, before the inclusion takes effect, the stock should show a "celebratory" trend. Among the 33 stocks that will soon be included in the Hong Kong Stock Connect, Crystal Technology, Dah Sing Bank Group, and DEKON AGR saw significant price increases today. Crystal Technology, for example, has been rising since August 29, with a cumulative increase of 149% as of the closing on September 5. Dah Sing Bank experienced a 9% surge on August 30, and DEKON AGR has risen by 28% since August 30. Crystal Technology, a new stock listed in June this year with a market value of about 18 billion Hong Kong dollars, quickly entered the Hong Kong Stock Connect as it met the market value requirements of Hang Seng large and medium-sized stocks. After a recent continuous rise, its market value has now reached 51.9 billion Hong Kong dollars. Additionally, stocks such as KINETIC DEV, STELLA HOLDINGS, China Shipbuilding Leasing, and LAOPU GOLD are trading at high levels. However, stocks like Songsen International and DALIPAL HLDG are in a continuous downtrend. Meanwhile, SANERGY GROUP suffered a 98% drop on September 3, causing significant damage. Looking back at historical data, we analyzed the announcement date, effective date, price change on announcement day, trend from announcement to effective date, as well as price change on and after the effective date of 28 stocks listed since the beginning of 2023. The data shows that generally, the trend from announcement to effective date or the day before the effective date is mostly upward. For example, among the 28 stocks analyzed, the average increase from announcement to effective date was 2.7%, while the average increase on the day before the effective date was 1.2%. Although the numbers are not extremely high, considering that many stocks had already accumulated gains prior to the inclusion, and the time span from announcement to effective date is not long, such price increases are statistically significant. Additionally, an interesting phenomenon is that some stocks experienced dramatic fluctuations in price around the announcement, from announcement to effective date, the day before effective date, the effective date, and the week after the effective date. ZX INC is a prime example of this. ZX INC surged 24% on the announcement day, but the increase narrowed to 3% from announcement to effective date, plunged by 45% on the day before the effective date, surged by 15% on the effective date, and then dropped by 38% in the week after the effective date. Therefore, although being included in the Hong Kong Stock Connect is nominally positive, the specific situation needs to be analyzed individually based on each stock's actual circumstances. With the inclusion taking effect soon, some stocks have already started to experience fluctuations. From the author's perspective, for investors participating in the inclusion game, the most prudent strategy is to manage their positions appropriately from the announcement to the effective date, to prevent being caught off guard when stock prices experience significant fluctuations around the effective date. 2. Which Stocks Are Most Loved by the Hong Kong Stock Connect Investors? Undoubtedly, in recent years, southbound capital has become the most important source of capital inflow for the Hong Kong stock market. Stocks that are favored by investors through the Hong Kong Stock Connect often become market hotspots. So, what are the characteristics of stocks favored by Hong Kong Stock Connect investors? As of the closing today, we have compiled the Hong Kong Stock Connect holding ratios for all Hong Kong stocks, and listed the stocks with a Hong Kong Stock Connect holding ratio exceeding 20%, as shown in the table below. Based on the analysis of the listing date, sector classification, peak price occurrence, and recent trends of these stocks, we have identified the characteristics of stocks with high Hong Kong Stock Connect holding ratios in terms of market value, sector, and historical performance: (1) First, in terms of market value, these stocks generally have a market value of 500 billion Hong Kong dollars or less, except for large blue-chip stocks such as Semiconductor Manufacturing International Corporation, CHINA RES POWER, INNOVENT BIO, and CNOOC. However, if we expand the Hong Kong Stock Connect holding ratio to over 10%, we will see a significant increase in the number of large-cap stocks, including Xiaomi Group, Meituan, Xpeng Motors, NIO, China Unicom, and even China Mobile Limited and Tencent, the top three stocks by market capitalization. Therefore, the first conclusion we can draw is that the stocks with the highest Hong Kong Stock Connect holding ratios are generally mid-cap stocks, while the stocks with intermediate Hong Kong Stock Connect holding ratios tend to be more large and mid-cap stocks. (2) Secondly, there is a clustering phenomenon in terms of sector characteristics. They can generally be divided into three categories: the first category dates back to 2007.Old shares of the city, many of which are value investment stocks, such as State Grid Corporation of China, China National Petroleum Corporation, China Construction Bank, Industrial and Commercial Bank of China, and so on.The second category is some concept stocks that formed a bull market driven by the southbound funds in 2015. For example, EB ENVIRONMENT, DYNAGREEN ENV, MEITU, etc. Speaking of the names of these stocks, there is a sense of outdated hot topics and wilting tomorrow. The third category is the concept stocks that formed during the bull market from 2019 to 2021. There are many sectors, such as biopharmaceuticals (18A), chip semiconductors, 5G, cloud computing, Internet of Things, new energy, new economy, new consumption, etc. There are also many stocks, such as POLY PPT SER, AKESO, JXR, WUXI BIO, KINGDEE INT'L, XD INC, KINGSRUN, Chinasoft International, LI NING, Semiconductor Manufacturing International Corporation, INNOVENT BIO, XIABUXIABU, BiliBili, etc. (3) Stock Price Trends For stocks with a holding ratio of over 20% in the Hong Kong Stock Connect, except for a few that recently hit new highs, such as CNOOC, the vast majority experienced significant declines in the past year or two. The peak prices of most stocks coincided with the hottest times in their respective sectors. For example, stocks in the 18A sector like AKESO, JXR, WUXI BIO, had their peaks largely concentrated in the late 2020 to early 2021 timeframe. On the other hand, new consumption concept stocks like XIABUXIABU, BiliBili, LI NING had their peaks mostly in the first half of 2021. As for the earlier hotspots, stocks formed during the frenzy of the 2015 southbound funds bull market, such as EB ENVIRONMENT, ALI PICTURES, reached their highest points in the summer of 2015. Additionally, there are quite a few stocks in the statistics that went public after 2020, many of which either peaked at their IPO or began a decline shortly after listing, marked by the lifting of lock-up periods or inclusion in the stock connect, for example, POLY PPT SER, etc. The list goes on. A sad and undeniable fact is that stocks with a holding ratio of over 20% in the Hong Kong Stock Connect, except for CNOOC and China National Gold Group Gold Jewellery, which hit their historical highs in 2024, have all been on the decline this year. Some have not just fallen this year but have been on a continuous decline for two to three years. This raises a disheartening question is the Hong Kong Stock Connect really playing the role of a buyer of last resort? 3 Is the Hong Kong Stock Connect really the buyer of last resort? Let's not rush to conclusions but look at the statistics first. Assuming we don't consider the latest adjustments that are pending, since the Shanghai-Hong Kong Stock Connect was launched in November 2014 and the Shenzhen-Hong Kong Stock Connect was launched in December 2016, there are a total of 525 stocks in the Hong Kong stock market that are included in the Hong Kong Stock Connect, forming the sample group for studying this sub-market. Among these, there are 69 stocks with a holding ratio of over 20% in the Hong Kong Stock Connect, and 205 stocks with a holding ratio over 10%. Among these 525 stocks, only 22 stocks reached their historical highs in 2024. Among them, 9 were newly listed in the second half of 2023 or the first half of this year, coinciding with the end of the lock-up period and the crucial moment of inclusion in the stock connect in 2024. In other words, the majority of these 525 Hong Kong Stock Connect stocks have experienced at least 1 year of decline. We tracked the time when the historical high price of these stocks occurred, and the majority were concentrated in the periods of 2007-2008, 2015-2018, and 2020-2021. These three time periods correspond to the three significant bull markets in Hong Kong's history. If we make a precise calculation, the average drop from the historical high prices of these 525 stocks is 72.13%, while for the 205 stocks with a holding ratio of over 10% in the Hong Kong Stock Connect, the average drop from their historical high prices is 74.63%. For the 69 stocks with a holding ratio of over 20% in the Hong Kong Stock Connect, the average drop from their historical high prices is 78.37%. From this preliminary observation, it can be seen that the higher the holding ratio in the Hong Kong Stock Connect, the deeper the retracement from the historical high price. In addition, when looking at the data from the last year, the average retraction of all 525 Hong Kong Stock Connect stocks in the past year is 15.54%, for the 205 stocks with a holding ratio higher than 10%, the average retraction in the past year is 20.17%, and for the "high Hong Kong Stock Connect stocks" with a holding ratio higher than 20%, the average retraction in the past year is as high as 25.42%. - Showing a similar distribution pattern to the retracement from the historical high price. For the five stocks with a holding ratio higher than 40% in the Hong Kong Stock Connect, MOG DIGITECH, POLY PPT SER, DONGFENG GROUP, XINTE ENERGY, and ZHEJIANGEXPRESS, the average cumulative drop from their historical high points is as high as 80%, with an average drop of 42.67% in the past year. Therefore, in general, it can be said that the higher the holding ratio in the Hong Kong Stock Connect, the more prone it is to decline. Of course, this cannot be generalized. For example, CNOOC, with a holding ratio of 20.03% in the Hong Kong Stock Connect, has only retraced 16% from its historical high price, and not only has not fallen in the past year, but has also seen a 54% increase. However, such cases are only found in a few individual stocks. As for whether the high holding ratio in the Hong Kong Stock Connect is the cause or the result of the decline, a reasonable inference is that Hong Kong Stock Connect investors, whether institutional or individual, tend to buy more as the price falls under certain investment principles. Due to the fact that foreign capital/Hong Kong capital and Hong Kong Stock Connect funds are essentially in opposition in the Hong Kong stock market, with the former continuously selling and the latter continuously buying, the result is that the stock price falls deeper, while the holding ratio in the Hong Kong Stock Connect keeps rising. In this sense, it seems not exaggerated to say that the Hong Kong Stock Connect is the buyer of last resort. 4 How does the Hong Kong Stock Connect harvest leeks?"Bonjour, comment a va?" "Hello, how are you?"Currently, as liquidity in the Hong Kong stock market weakens, the Stock Connect has become almost the only way for incremental funds. However, in recent years, some stocks have used the Stock Connect as a new tool to exploit investors, especially in the new stock market. Once a new stock is included in the Stock Connect, passive funds tracking the corresponding index will be built up. Within the first six months to a year after the new stock is listed, it faces pressure, so the passive funds from the Stock Connect are forced to deal with the unlocking of funds. As a result, the inclusion in the Stock Connect has become another important time point in market fluctuations besides the unlocking of funds. Furthermore, if the inclusion fails, it can easily lead to a sudden drop in prices. An example of this is SANERGY GROUP, whose stock price plummeted by 98% in a single day recently. According to our previous analysis, SANERGY GROUP began to hype up its inclusion in the Stock Connect after its listing, experiencing a surge in price nearly tenfold from April onwards. By the end of June, when the Hang Seng Index conducted its semi-annual review, SANERGY GROUP's market value met the requirements for inclusion in the Stock Connect. However, in early August, the Hong Kong Securities and Futures Commission identified four highly concentrated stocks, known as "controlling stakes." As a result, just before the final step of inclusion, the dream was shattered. Investors need to have a discerning eye and avoid falling into traps set by stocks using the Stock Connect as a tool to exploit investors. On August 27th, the Hang Seng Index Company announced new regulations affecting the Stock Connect, namely the calculation method for the "12-month average market value" requirement and how to handle stocks that have been suspended for a long time. This sparked widespread concern. The new method of calculating the average market value over all trading days in the past 12 months instead of just at the end of each month will make the criteria for inclusion in the Stock Connect stricter and reduce the possibility of manipulation. Under the previous rules, companies could manipulate their market value by adjusting it on the last trading day of each month, but under the new regulations, they must manage their market value daily, posing a significant challenge. Although the intention behind these changes is to prevent companies from exploiting loopholes for speculation, it may also lead to more companies being excluded from the Stock Connect, which is currently a vital source of liquidity for many stocks in the Hong Kong market. It is evident that the expansion of the Stock Connect is not just a matter of the stock market or capital market, but it also has broader implications for society and people's livelihoods. Companies that have already gone public should focus on operating their businesses and creating value, rather than playing with the Stock Connect, one of the most important sources of incremental funds in the Hong Kong stock market.