China International Capital Corporation: The Impact and Significance of the Expansion of the Hang Seng Technology Index

CICC released a research report stating that on August 10, the Hang Seng Index Company published a consultation on its official website regarding the revision plan for the calculation methodology of the Hang Seng Technology Index. The core content includes: expanding the thematic scope of the index, adjusting the selection mechanism for constituent stocks, and increasing the number of constituent stocks. Should adjustments be made based on this consultation document, CICC believes this will mark the most profound and systematic change to the Hang Seng Technology Index since its launch in 2020. It will not only align more closely with global technological development trends, but also maintain the indexs representativeness of the Hong Kong tech sector amidst the ongoing trend of companies listing from A shares to H shares. 1. Revision Content: Expansion to 50 Stocks, Reconstructing Industry Themes, and Income Growth Stock Selection CICC considers this revision plan for the Hang Seng Technology Index's calculation methodology to be the biggest reform since the index was launched because it not only expands the indexs coverage quantitatively, but also reconstructs the classification of technology themes to align more closely with the latest market developments. Additionally, it introduces a stock selection mechanism based on income growth, allowing technology companies with income growth potential to be included. This comprehensively updates and optimizes the stock selection process. Specifically, Index Expansion: The number of constituent stocks increases from 30 to 50, making it richer and more balanced. The most direct change in this adjustment plan is the increase in the number of constituent stocks from the previous 30 to 50, which directly expands the coverage of the index. Meanwhile, according to simulated calculations in the consultation document, the additional 20 slots will mainly be allocated to "emerging" themes such as high-end hardware, Siasun Robot & Automation, and artificial intelligence. The previously dominant Internet company NETDRAGON remains unchanged in number, but the weight of the top ten companies in the new index decreases from 70.6% to 66.3%, and the decline in concentration also signifies a reduction in the impact of fluctuations from some large-cap leading companies on the index. It is noteworthy that in the results and summary of the consultation published by the Hang Seng Index Company in March 2021 regarding optimization of the Hang Seng Index to make it the most representative and important market benchmark in Hong Kong, the expansion of index constituents was also included. However, unlike the previous document, which explicitly stated the target to increase the number of constituent stocks to 80 by mid-2022, eventually reaching a fixed number of 100, the current consultation draft does not specify a timeline for the expansion target. Therefore, it cannot be ruled out that the number of constituent stocks for the Hang Seng Technology Index will directly increase from 30 to 50 by the adjustment date in December this year. Theme Reconstruction: Candidate companies must be highly relevant to six designated technology themes, aligning more closely with current technology development directions. The Hang Seng Technology Index has long been criticized for its excessive exposure to consumption and its low exposure to hard technology, which has been a reason for its underperformance this year. To address this issue, in addition to the expansion of the index, the Hang Seng Index Company proposes to abolish the current industry classification system (HSICS), which categorizes industries (currently including internet, e-commerce, digital, fintech, cloud, and smart technology). As a replacement, the new index has reconstructed six themes that are more closely aligned with global technological development and 16 sub-themes, namely: 1) Digital Platforms and Solutions (including internet, software and services, and digital finance), 2) Artificial Intelligence (infrastructure, applications, and platforms), 3) Advanced Hardware (semiconductors, smart devices, and new energy storage), 4) Siasun Robot & Automation and Automation (including Siasun Robot & Automation and autonomous driving), 5) Cloud (big data, data centers), and 6) Cutting-Edge Technology (aerospace, quantum computing, brain-computer interfaces, new food technology, and advanced materials). Introducing Group Stock Selection Mechanism: In addition to market capitalization ranking, an income growth stock selection mechanism is added. In this consultation document, the requirements for the target pool (Hang Seng Composite Index large and medium-sized stocks), liquidity (monthly turnover rate of 0.1%), and innovation selection (R&D/revenue 5% or revenue growth 10% or technology platform operation) remain unchanged. However, a new design allows for the selection of the top 40 companies by market capitalization from the qualified candidates among the 50 constituent stocks. The remaining 10 slots will be filled based on revenue growth over the past 12 months. This change gives smaller but rapidly growing companies the opportunity to be included in the Hang Seng Technology Index, focusing not only on "big and beautiful" but also on "technological growth potential." 2. Which Companies Might Be Included? Selection from Market Cap and Growth Groups, with Hard Technology Dominating Based on data as of June 30, 2026, concerning the Hang Seng Composite Indexs large and medium-sized stocks, market capitalization and liquidity, revenue growth in 2025, and potential industry classification as proposed in the consultation document, CICC predicts that the following stocks may meet the criteria for inclusion in the Hang Seng Technology Index. The adjusted thematic distribution is expected to consist of 15 advanced manufacturing stocks, 14 digital platforms and solutions stocks, 12 Siasun Robot & Automation and Automation stocks, 6 artificial intelligence stocks, and 3 cloud stocks. Among these, 10 stocks will be included based on market capitalization ranking, and another 10 will be determined based on revenue growth ranking. Additionally, considering the relatively vague descriptions regarding revenue growth calculations in the consultation draft, as well as adjustments made to match the number of industries proposed by the Hang Seng Index Company, It is important to note that the adjustments predictions used data as of June 30. The formal adjustments will utilize data as of September 30, which may lead to discrepancies upon the actual adjustment in December. For example, recently listed A to H tech leaders, which have garnered significant market attention, might meet the inclusion criteria by then, and CICC will update its predictions accordingly. 3. Potential Impact? Optimizing Index Structure in the Long Run to Enhance Technological Representativeness and Attractiveness In the short term, the influx of capital into newly included stocks will have a positive impact. Based on CICC's predicted potential inclusions along with the current weights and market capitalization of existing constituent stocks, the estimated weights that the adjusted 50 stocks may achieve in the Hang Seng Technology Index were calculated. When assessing trading and portfolio adjustments, it is also important to consider the daily trading volume of each stock to gauge its specific impact. According to the consultation draft, the total asset management scale that is tracking the Hang Seng Index reaches $40.4 billion. Combined with the daily trading amounts of individual stocks over the past three months, CICC's calculations are detailed in the original report. It should be noted that this weight calculation is based on data as of June 30. Many newly listed stocks this year will also enter the screening scope, and multiple stocks will face unblocking factors in the second half of the year. Therefore, the calculation of potential impacts at the stock level is merely a reference for this fitting and does not represent the actual measurement after the formal adjustments at year-end. In the long run, this will help enhance the representativeness and attractiveness of the Hang Seng Technology Index. As the flagship index representing the technology sector of the Hong Kong stock market, the Hang Seng Technology Index has performed poorly this year, with a decline of 13.4% year-to-date. Although it is also a technology index, this performance pales in comparison to the significant increases driven by the AI tech wave this year in nearby indices such as Koreas KOSPI (+56.1%), Nikkei 225 (+34.1%), and A-share Sci-Tech Innovation (+23.4%). One significant reason for the weak performance of Hong Kong stocks this year is structural mismatch, as the Hang Seng Technology Index has over 70% weight in internet platforms, e-commerce, new energy vehicles, and consumer electronics related to domestic demand, with index earnings highly correlated to the domestic consumption sentiment. In recent years, the wave of A to H listings has attracted an increasing number of A-share "hard technology" leaders to list in Hong Kong, resulting in some improvement in the overall landscape of the Hong Kong market. The revision of the calculation methodology for the Hang Seng Technology Index is expected to organically combine with this wave, expanding the coverage of constituent stocks at the individual level and optimizing the classification of themes to align more closely with the latest market developments. The novel introduction of the income growth stock selection mechanism is also noteworthy. These optimizations are expected to synergize, shifting the focus of the Hang Seng Technology Index from merely valuing "big and beautiful" stocks to being more inclusive, allowing many truly rapidly growing but smaller companies to be included, thereby enhancing market representation and aligning with global technological development trends. 4. Adjustment Timeline? The Final Plan Will Be Announced at the End of September, and the Index Adjustment Will Take Effect in Early December The consultation draft mentions that the potential related revisions to the Hang Seng Technology Index are expected to be announced by the end of September this year and implemented in the index review as of September 30. Any changes to the constituent stocks will take effect on December 4, 2026 (after the market close on the first Friday of the first week of December). According to past practices, the announcement of this adjustment will occur in early November, at which time CICC will also update its predictive report based on the latest conditions and data. Chart 1: Comparison of Hang Seng Technology Index Calculation Guidelines Source: Hang Seng Index Company, CICC Research Department Chart 2: Proposed Revisions Regarding Technology Themes and Sub-themes Source: Hang Seng Index Company, CICC Research Department Chart 3: Proposed Industry Distribution After Fitting by the Hang Seng Index Company Note: Data as of June 30, 2026 Source: Hang Seng Index Company, CICC Research Department