Hang Seng Indexes has proposed a major expansion of the Hang Seng Tech Index, increasing the number of constituents to 50 from 30 and introducing a revenue-growth criterion for the first time. While the changes would inject fresh growth-oriented names, the index’s top-heavy structure is unlikely to shift meaningfully. CATL, UBTech and 18 other stocks are tipped for inclusion.
The proposed revisions, outlined in a recent consultation paper, aim to broaden the index’s technology-sector coverage and address the tendency for fast-growing companies to have relatively small market capitalizations.
Under the plan, the index would add a new “revenue growth” screening category alongside existing market-cap requirements. The number of constituents would rise to 50, up from the current 30.
Shenwan Hongyuan analyst Dong Yi’s team said the changes would enhance the index’s growth profile and representativeness to some extent. But with the weighting methodology unchanged, the impact on the current weight structure would be limited. The revenue-growth filter also fails to account for sector cyclicality, the brokerage noted.
The technology sector’s inherent characteristics mean the long-term performance of a tech index relies more on continuous iteration, the analysts said. An inclusive IPO environment and stock-selection criteria that balance stability with timeliness are therefore the institutional bedrock for sustained outperformance, they added.
Revenue-Growth Cohort Carries Modest Weight
According to Hang Seng Indexes’ own calculations, the 10 stocks added via the revenue-growth channel would have a combined weight of just 2.4% — far below the 88.5% weight of existing constituents and the 9.1% allocated to the 10 stocks in the new market-cap cohort. Passive funds tracking the index would therefore direct only limited inflows to the revenue-growth additions, Shenwan Hongyuan said.
Moreover, while the revenue-growth filter would enhance the index’s growth orientation, it cannot filter out the influence of cyclical industries, the analysts warned. Some de facto cyclical stocks could be included at the peak of their revenue growth, only to see growth decelerate thereafter. Given Hong Kong’s semi-annual mandatory reporting cycle, a stock must typically wait two reporting periods — a full year — to qualify as a “high-growth” name, meaning inclusion could still lag behind the inflection point.
“This paradox illustrates the difficulty of tech investing,” the team wrote. “Trying to identify high-potential tech stocks through an objective, backward-looking and rigid screening condition is almost an impossible task. The complex, non-linear nature of the tech sector means stock selection depends more on the foresight and flexibility of active managers.”
Top-Heavy Structure Unchanged; Active Funds Feel Greater Pinch
The “80-20” concentration dynamic within the Hang Seng Tech Index is unlikely to fundamentally change, Shenwan Hongyuan said. Because free-float market capitalizations vary enormously among constituents while the individual stock weighting cap is 8%, larger stocks already have their index weights effectively suppressed.
Since the proposed revisions do not alter the weighting methodology, dilution from the expanded constituent count would have only a marginal impact on heavyweights, the analysts said. Price impact would also be limited, as ETF rebalancing for Hong Kong index trackers is concentrated in closing auctions with price stabilization mechanisms.
The index compiler’s estimates show the aggregate weight of the top 10 constituents would decline to 66.3% from the current 70.6%.
“Compared with passive funds, we believe the expansion would have a greater impact on some active funds, which often use major index constituents as their investable universe,” the analysts noted.
Potential Additions
If the proposal is approved, Shenwan Hongyuan expects the following 20 stocks to be added: CATL (3750.HK), Iluvatar CoreX (9903.HK), ASMPT (0522.HK), GDS Holdings (9698.HK), AAC Technologies (2018.HK), Biren Technology (6082.HK), UBTech Robotics (9880.HK), Kingboard Laminates (1888.HK), Smoore International (6969.HK), and Foxconn Interconnect Technology (6088.HK).
Revenue-growth cohort: XtalPi Holdings (2228.HK), MicroPort MedBot (2252.HK), WeRide (0800.HK), Meifuguo (2556.HK), Black Sesame International (2533.HK), DeepTek (1384.HK), JF Wealth Holdings (9636.HK), Innoscience (2577.HK), Hesai Group (2525.HK), and Central New Energy (1735.HK).