Xiaomi and Meituan Dianping were the first such stocks added to the trading link, according to a Shanghai Stock Exchange notice on Friday after market close.

“Both Xiaomi and Meituan are household names to the average retail investor in China. Granting these investors access to buy such stocks will definitely benefit the share prices,” said Kevin Leung, executive director of investment strategy at brokerage Haitong International.

Last Monday, the first trading day after the announcement out of China that such stocks would be included on the Stock Connect, Meituan shot up 4.3 per cent and Xiaomi jumped 5 per cent.

The shares went on a wild ride since then, with Meituan plunging 6.2 per cent on Tuesday and Xiaomi shedding 1.5 per cent, as skittish investors pulled out with quick profits. Meituan ended the week 1 per cent lower, while Xiaomi gained 6 per cent.

They are the only two stocks that meet the new criteria to be added to the Connect, including having an average market cap of at least HK$20 billion (US$2.6 billion).

The inclusion could not come at a better time for Xiaomi, whose shares have been beaten down 30 per cent this year as it has struggled to create a revenue stream beyond smartphone sales. Investor darling Meituan, in contrast, is up 109 per cent for the year.

“The stock price of Xiaomi will probably be explosive initially when it’s included in the Stock Connect,” said Alan Li, portfolio manager at Atta Capital. “The inclusion is a strong catalyst that will stimulate share prices and elevate valuation levels, even though the surge may not be sustained in the long run.”

The inflow could be as much as US$1.4 billion for Meituan and US$1.6 billion for Xiaomi – equivalent to 11 per cent and 14 per cent of their respective free-float market value – if past behaviour is any guidance, analysts at Goldman Sachs wrote in a report dated October 22.

In mainland China, investors have been pouring out their feelings – from excitement to resentment – on investment online forums. China’s army of 148 million retail investors is the largest in the world.

“I’ve been using Xiaomi electronics for ages. It should be included in the Stock Connect so I can also buy some of its shares,” one user wrote on Xueqiu. “Finally, the spring for Xiaomi is coming!” another wrote on Weibo after the announcement.

But others fumed that the inclusion will come too late for them to harvest the spectacular run-up in Meituan.

“I wanted to buy Meituan much earlier, it’s so frustrating that it would only be available after the shares have gained so much,” one trader wrote on Xueqiu.

China tightly restricts how money enters and leaves mainland China. The Stock Connect – set up in 2014 – has been one way Chinese traders can invest outside the mainland.

Such “southbound” Connect trading accounts for about 6 per cent of the daily turnover in the Hong Kong market. Southbound investors end up placing about 85 per cent of their capital in mainland Chinese companies listed in Hong Kong, reflecting a strong “home bias”, according to the Goldman Sachs report.

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The most favoured stock among mainland Chinese investors is Industrial and Commercial Bank of China, China’s largest commercial lender. They own a combined 22 per cent, worth HK$103 billion, of the free-float shares of ICBC, Wind data shows.

The access to stocks with a weighted voting rights structure – which is only allowed in mainland China on the new and small Star tech board – will give onshore investors the chance to share in the success of China’s fastest-growing internet companies, which had mostly chosen to list in New York over the past decade before Hong Kong gave the green light to dual-class shares in a major listing reform in April 2018.

The step by China to allow southbound trading of dual-class shares could entice some US-listed Chinese tech companies – like Alibaba Group, the owner of the South China Morning Post – to either delist and move to the Hong Kong exchange or have a secondary offering there, said Industrial Securities analysts led by Zhang Yidong.

The move comes as interest in China’s Star market has gone from frenzied to tepid, with trading volumes plunging and gains narrowing.

Part of the appeal of the new board was the relaxation of curbs in the main markets aimed at restraining huge price swings, including caps on how much a stock can go up or down in a day. In Hong Kong, there are no such curbs, underscoring an additional reason for interest in Xiaomi and Meituan.

Shares of Xiaomi, which occupies a 14 per cent market share in terms of smartphone in China, have been bleeding since its initial public offering in July 2018. Investors questioned its valuation level as they increasingly see it as a hardware producer, instead of an internet service provider as it claims to be.

Meanwhile, China’s smartphone market – the world’s largest – is also slowing down after years of breakneck growth.

The result is that Xiaomi is now trading at a trough valuation of 16.6 times forward price-to-earnings (PE) ratio.

“The current PE ratio has fully reflected the market’s negative expectations for Xiaomi,” Citic Securities analysts led by Xu Yingbo wrote in a report published on October 21.

The valuation level could improve, considering electronics producers enjoy a 30 times PE ratio on average in the A-share market, and 23 times in Hong Kong, they wrote.

Meituan Dianping, on the other hand, is not cheap by valuation level but offers a rare steady growth prospect, Li said.

While the two stocks are expected to draw big interest from mainland investors at least initially, he cautioned that enthusiasm may fade over time as more companies with dual-class shares go public in the city.

“As investors have more options for buying, the share price will stabilise and fall back a bit,” he said.