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SCMP Reporter

DESPITE the lower market capitalisations of the seven new Hang Seng Index constituents, members of the revised index will still represent 70 per cent of the total market capitalisation.

  HSI Services director Anthony Wong Kin-kwan said there were three criteria in selecting the counters to replace the five delisting Jardine stocks and the two poorly-performing index stocks.

   Besides having its principal base in Hong Kong, the stock must satisfy a minimum average monthly market value for the last 12 months and a minimum aggregate monthly turnover value for the last 24 months.

  Although the seven recruits have a total market value of about $85 billion - much lower than the $177 billion of the seven stocks being removed from the index - the ratio of 70 per cent to total market capitalisation is still being maintained.

  'This is to ensure that the index can accurately track the movement of the entire market,' said Mr Wong.

  The ratio will be kept because the total market capitalisation will shrink slightly after the Jardine companies are delisted.

  Consideration was also given to ensure that stocks taken out from the various sub-indices were replaced by similar stocks.

   Because six out of the seven stocks to be taken out belong to the commerce and industry sector, substitute stocks should also make similar representation. The other stock being removed is from properties.

  Other guidelines in the selection process include the prevailing and past financial conditions of the company, earning records and growth prospects, business prospects of the industry in which the company belongs and the management qualities of the company.

  Mr Wong said the inclusion of two media stocks, the South China Morning Post (Holdings) and the Oriental Press Group, was because they both belonged to the commerce and industry sector and their turnover and market capitalisation records were favourable.

  Commenting that commerce and industry was an all-embracing category that covered a wide range of companies, he said adding two media stocks to the index was just a coincidence.

  Despite the intention to replace 'apple with apple', the new list took in one more property counter, taking the number of stocks in the properties sub-index to 10. Accordingly, the commerce and industry sub-index will have 16 stocks instead of 17.

  'No two companies are strictly alike. We have to balance between maintaining the coverage ratio and replacing stocks with stocks that belong to the same sector,' said Mr Wong.

  'We had tried hard to find another commerce and industry stock. But we are happy with the just announced make-up,' he said.

        Companies falling in the right category might not be able to meet the criteria on market value and turnover, he said.

  The decision to remove Winsor Industrial Corp and Lai Sun Garment (International) from the index was made after observing their turnover and market value for several quarters.

  'We drew up a list of the top 100 listed companies and compared their relative rankings on the list,' Mr Wong said.



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Hang Seng Index

Revised indicator will still reflect 70pc of market value