Tencent, China Mobile and other China new-economy stocks set to join H-share index

China Mobile, CNOOC and other mainland companies that are incorporated overseas may be added to the Hang Seng China Enterprises Index as part of a regular review next week, according to China International Capital Corp.

China Unicom, China Resources Land and Tencent Holdings have also been shortlisted as new candidates for the so-called H-share gauge, Wang Hanfeng and Lin Yingqi, analysts at the investment bank, wrote in a note on Tuesday.

After the rebalancing, the weighting of China’s new-economy companies is likely to make up 28 per cent of the H-share index, compared with 6 per cent currently, according to the report.

The move underpins more efforts by Hong Kong, a major offshore venue for listings of mainland-based companies, to provide global investors a deeper insight into China’s ongoing transition to a more service and technology oriented economy.

The change has also been reflected in the stock market, with Tencent now the most valuable company on the Hang Seng Index. The Hong Kong exchange is in the midst of revising its listing rules to attract more listings of technology and biotech firms after the successful initial public offering of online insurer ZhongAn Online P&C Insurance.

“HSCEI’s valuation is likely to expand and its earnings growth may accelerate following the rebalancing,” said Wang and Lin in the report.

The Hang Seng China Enterprises Index, which comprises 40 mainland companies, is now valued at 8.6 times estimated earnings and trades at a 33 per cent discount to the benchmark Hang Seng Index, according to Bloomberg data.

The cheaper valuation is because financial companies account for 73 per cent of the gauge’s weighting, as Chinese lenders are seen as old-economy stocks and have for long been out of favour with investors amid government efforts to reduce the reliance on credit growth as a growth driver.

The top three weightings on the H-share index are China Construction Bank, Bank of China and Industrial & Commercial Bank of China, which make up a third of the weighting on the measure, Bloomberg data showed.

The weighting of financial stocks will probably drop to 53 per cent from 73 per cent after the review, CICC said. The investment bank also said China Railway Construction may be dropped from the index.

Hang Seng Indexes, the compiler of Hong Kong’s benchmark stock gauge and the H-share gauge, is due to announce the results of its review on February 6 and the official change of the index will take place on March 5.