WITH the dust pretty much settled on the Hang Seng index constituent changes, HSI Service's intentions have become a little clearer. A number of brokerages have been exercising their computers, running bench tests of the new index and the mix of stocks that will exist in the transition period. The index changes were prompted by the Jardine Group deciding to quit their secondary listings here. Group parent Jardine Matheson and group holding company Jardine Strategic will leave the index first in November. They will be followed by Dairy Farm International, Hongkong Land and Mandarin Oriental in February. Along with the Jardine companies, Lai Sun and Winsor are being removed. In two waves these companies will be replaced by Johnson Electric, Shangri-La Asia, SCMP, Oriental Press, Sino Land, Amoy Properties and Guangdong Investments. Salomon Brothers, in a recent evaluation of the changes, appears to indicate that the new index will have similar earnings, valuation and representative market capitalisation to the old index. From a purely mathematical point of view it looked as though HSI Services were seeking to maintain as much continuity as possible for investors. The old index represents about 86.4 per cent of local market capitalisation of about US$315 billion, compared with the new index covering about 69.6 per cent of the new market capitalisation of about $295 billion. Overall, the new constituents are less liquid than the stocks about to leave the index, with the differential being quite high, because the new constituents are about 38 per cent less liquid than those about to quit. There is little change in earnings per share or the price-earnings ratio, being 13.7 times earnings this year and 11.6 times next year on the old index and 13.8 times and 11.7 times, respectively, on the new index. Earnings per share under the old index this year is expected at 16 per cent and next year it is about 18.4 per cent compared with the 22.6 per cent this year and 18.4 per cent next year under the new index. There will be an increase in the weightings of the leading shares in banking, property and utilities, which tend to be the stocks with the most liquidity. According to Salomon there is not much overall difference between the index price when comparing the current index with the changes planned on a pro forma basis.
