Will US-China Tensions Spur a Hong Kong IPO Wave? Introducing the Hang Seng Tech Index

What is Hang Seng Tech Index - An Introduction

Launched on 27 July 2020, the Hang Seng Tech Index (HSTECH) is madeup of the 30 largest tech stocks listed in Hong Kong. It represents China’s fast growing ‘new economy’ and rides the tailwind of a growing number of IPOs and secondary listings in Hong Kong amid US-China trade tensions. Stricter listing rules imposed by US regulators in 2020-2021 prompted Chinese tech firms to consider Hong Kong as an alternative venue to raise capital.

HSTECH acts as a market bellwether and fills a structural gap among existing indices to provide a more comprehensive picture of China’s emerging technology sector.

Firms such as Tencent, Alibaba and Meituanhave reshaped China's service-oriented new economy, accelerating a shift away from the old infrastructure- and export-oriented growth model. Companies in the HSTECH have registered much faster growth rates compared to China's GDP over the last four years (chart below).

HSTECH Revenue Growth vs China GDP Growth

Hang Seng Tech Index vs. Hang Seng Index

The Hang Seng Tech Index (HSTECH) is a freefloat, market capitalization weighted index. It applies an 8% weighting cap on individual constituent and is reviewed and rebalanced quarterly.

HSTECH is a tech-heavy benchmark, with information technology companies contributing more than 70% of its weighting. Growth firms tend to have higher financial performance multiples, such as the PE ratio, and lower dividend yields. This is because most of them reinvest profits in technology re-development and gaining market share. These unique features distinguish HSTECH from the Hang Seng Index (HSI), which is the most widely used benchmark for the broader Hong Kong stock market. The key differences are illustrated below.

Top constituents and what they do

The top 10 constituents in HSTECH are listed as follow.We can compare them with the top 10 companies in the NASDAQ 100, the most followed tech benchmark in the world.

Top 10 Stocks in the HSTECH and NASDAQ 100

It is worth noting that 8 out of the top 10 HSTECH companies are involved in the so-called “platform economy”. This means that they aim to connect consumers, entrepreneurs, and the public through digital platforms. These include food-delivery services (Meituan), e-commerce (Alibaba and JD.COM), digital payments (Alipay, TenPay), short videos (Kuaishou), communications (WeChat), and healthcare (JD Health and Ali Health). The remaining two – Sunny Optical and SMIC – are doing high-tech manufacturing related to smartphone devices and semiconductors, respectively.

By contrast, only 3 of the top 10 Nasdaq 100 companiesare focused on platforms – Amazon, Facebook and Alphabet. Therefore, the Nasdaq 100 is more diversified and comprises a wider range of subsectors, such as software development (Adobe, Microsoft), electric vehicles (Tesla) and semiconductors (ASML).

Stock performance, sector outlook and regulatory risk

The majority of HSTECH companies are growth stocks, which tend to draw investors whoprioritize capital gains over dividend yield. Their performance depends on various factors, including the underlying macroeconomic backdrop, the companies’ varying business models, and the regulatory environment they are facing.

Most HSTECH component companies reside in mainland China, supported by a boom in e-commerce, digital payments, food delivery and streaming media services.Although they havefared well in the last decade or so, the recent tightening of regulatory oversight from Beijing may cast a shadow over the outlook going forward.

For example, Alibaba was fined US$2.8 billion in April 2021 amid Beijing’s sweeping anti-monopoly campaign, putting regulatory risk in the spotlight. Policy makers also came up with a minimum wage policy for workers, which may dampen growth prospects forfood deliveryservice leader Meituan. With this in mind, market participantswill be keen to monitor any upcoming regulatory changes.

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