Indexing Investment under Stock Connect Program Anita Mo Head of Business Development A joint venture of Nov 2016 1
China Exchanges Services Company Ltd. 33.3% 33.3% 33.3% 2
Cross Border Asset Allocation China s Capital Markets USD 15 Trillion Inflow Quota USD 300 Billion Stocks Bond 2% QFII+ RQFII Interbank Bond Market Northbound Connect After SZ-HK Stock Connect Outflow Quota USD 130 Billion Global Capital Markets USD 145 Trillion QDII Southbound Connect 0.1% After SZ-HK Stock Connect Stocks Bond Data Source: Administration of Exchange Control, People s Bank of China, HKEX, SSE, SZSE, China Bond, Bloomberg *People s Bank of China has abolished the limit of foreign central banks since the end of Sep 2016. The data is the estimated value of the inflow quota of interbank bond market in 2015. 3
SOUTH BOUND NORTH BOUND Evolution of Cross Border Investment Shanghai NB Connect Shenzhen NB Connect 1993 H- shares 1996 Redchips Eligible Stocks No. Mkt Cap 2014 567 (One single board) RMB 21.8 tri (85%) 2016 ~880 1 (Main:~270, SME:~410, ChiNext:~200) ~RMB 15 tri (74%) 2006 2011 SH-HK Stock Connect SZ-HK Stock Connect QDII QFII RQFII Eligible Stocks No. Mkt Cap Shanghai SB Connect 318 (Hang Seng Composite LargeCap, MidCap & A+H shares not in indices) HKD 19.8 tri (82%) Shenzhen SB Connect ~417 2 (Hang Seng Composite LargeCap, MidCap, SmallCap & A+H shares not in indices) ~HKD 21 tri (87%) 1. SZ Northbound: Constituents of SZSE Component & SZSE Small/Mid Cap Innovation indexes with market capitalization of at least RMB 6 bn, and SZSE-SEHK A+H shares (except shares under risk alert or delisting arrangement 2. SZ Southbound: Constituents of Hang Seng Large & MidCap indexes, constituents of Hang Seng SmallCap index with market capitalization of at least HKD 5 bn, and SSE-SEHK and SZSE-SEHK A+H shares 4
Southbound Trading Daily Average Net Flow (Mn, RMB) Quarterly Daily Average Q4 2014 470 Q1 2015 533 Q2 2015 1,302 Q3 2015-7 Q4 2015 412 Q1 2016 617 Q2 2016 1,232 3,000 2,500 2,772 2,442 2,000 1,500 1,000 500 - -500 1,276 463 473 937 790 818 668 614 502 466 332 169 234 315 104 98-40 -276 Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun 2014 2015 2016 Data Source: SSE 5
Northbound Trading Daily Average Net Flow (Mn, RMB) Quarterly Daily Average 5,000 Q4 2014 2286 Q1 2015 646 Q2 2015 295 Q3 2015-141 Q4 2015-461 Q1 2016 258 Q2 2016 139 4,055 4,000 3,000 2,000 1,000-1,401 566 1,050 444 790 295 1,021 81 180 0 541 106 184 124-1,000-199 -299-788 -249-2,000-1,432 Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun 2014 2015 2016 Data Source: HKEX 6
Market Value Distribution Hong Kong + Shanghai + Shenzhen 1 Stock Connect Universe 2 HK/Overse as 13% (987) HK Mainland 20% (700) SH 38% (1,021) Stock Connect HK Mainland 20% (323) HK/Oversea s 11% (94) SH 36% (567) SZ 29% (1,542) SZ 33% (880) Stock Connect captures representative universe from the respective markets 1. Data as of 30 Sep 2016 2. Estimated data as of end July 2016 7
Industry Distribution Tele Services mainly includes Red chips listed on HKEX Example: China Mobile (941) China Telecom (728) China Unicom (762) Industrials mainly includes A shares listed on SSE & SZSE Example: Shanghai International Port (Group) (600018) China State Construction Engineering (601668) Daqin Railway (601006) Financials mainly includes the unique financial stocks listed on HKEX Example:HKEX(388) AIA(1299) Sector(Weighting%) Southbound Trading Northbound Trading Differ Energy 3.9% 6.8% 2.8% Materials 1.5% 8.9% 7.4% Industrials 7.7% 16.1% 8.5% Consumer Disc 8.6% 13.0% 4.4% Consumer Stap 3.2% 5.9% 2.8% Health Care 1.7% 6.1% 4.3% Financials 45.4% 27.2% -18.2% IT 11.8% 11.5% -0.3% Tele Services 10.5% 0.4% -10.1% Utilities 5.7% 4.1% -1.5% Cross-border investment can have more comprehensive industry coverage. *Data Source: HKEX, CESC,as of 30 Sep 8
CES 120 under Stock Connect Stock Connect Universe 1 HK/Overseas 11% (94) 0005.HK HSBC 1299.HK AIA 0001.HK Cheung Kong 0016.HK Sun Hung Kai 2388.HK Bank of China CES 120 2 HK Mainland 20% (323) SH 36% (567) China Portion HK 37% (40) SH 53% (58) SZ 10% (22) SZ 33% (880) CES 120 = Complete China Index 1. Estimated data as of end July 2016 2. Full Market Value as of 30 Sep 2016 9
CES 120 Complete China Concept CES China 120 Index (CES 120) Top 80 A shares + Top 40 HK-listed Mainland shares Shanghai TOP 5 SH Constituents 1. ICBC (601398) 2. PETROCHINA (601857) 3. ABC (601288) 4. BOC (601988) 5. SINOPEC (600028) CES A80 (80 A shares ) NORTHBOUND Shenzhen (56%) (16%) TOP 5 SZ Constituents 1. CHINA VANKE (000002) 2. MIDEA GROUP (000333) 3. PING AN(000001) 4. HIKVISION (002415) 5. GUOSEN SEC(002736) CES HKMI (40 HK-listed Mainland shares) SOUTHBOUND Hong Kong (45%) TOP 5 HK Constituents 1. Tencent (700) 2. China Mobile (941) 3. CCB (939) 4. CNOOC (883) 5. ICBC (1398) 41% of Stock Connect Eligible Stocks Data Source: CESC, as of 30 Sep 2016 10
CES 120 Pioneer as Complete China Index CES120 Composed of A shares and Chinese stocks listed on HKEX The only index that covers the complete Chinese economy concept with futures The same time zone CES 120 MSCI China 0.3% 21% 45% 55% A share H, Red, P H, Red, P US B Share 79% MSCI China Includes B shares, H shares, Red chip, P chip and ADR Without A shares and planning to include A shares Different time zones Data Source:MSCI, CESC,June 2016 11
CES 120 5-yr Performance 2000 1800 1600 1400 1200 1000 800 CES 120 CSI 300 HSCEI 2000 1800 1600 1400 1200 1000 800 600 600 10/31/11 10/31/12 10/31/13 10/31/14 10/31/15 10/31/16 Return Volatility 1 year 3 years 5 years 1 year 3 years 5 years CES 120 3.16% 26.28% 25.12% 18.26% 21.72% 20.23% CSI 300-5.60% 40.55% 23.78% 21.97% 26.20% 23.88% HSCEI -8.05% -10.05% -9.07% 21.65% 24.48% 22.79% Source: CESC, as at Oct 31, 2016. Volatility is based on Daily Return, with annualized basis of 250 trading days. 12
CES 120 Complete China Concept Index Specifications Futures Specifications Criteria Descriptions Item Contract Terms Index Objective Index Universe MV Screen Measures overall performance of Chinese companies listed on SEHK, SSE and/or SZSE. A share listed on SSE and SZSE and Chinese companies listed on SEHK, which satisfied specific conditions. A shares: Top 80 by average daily market cap HK Chinese stocks: Top 40 by average daily market cap Underlying Index HKATS Code Contract Multiplier Minimum Fluctuation CES China 120 Index (CES 120) CHH HK$50 per index point 0.5 index point Liquidity Screen Calculation Rebalancing Top 50% average daily turnover Free float adjusted, market cap weighted Half-yearly Contract Months Trading Hours Spot month; Next calendar month; Next two calendar quarter months 9:15 a.m. - 12:00 noon 1:00 p.m. - 4:30 p.m. Reserve List Yes Closing Index on 14 Nov 2016 5,041.87 Contract Value USD 32k 13
Completing China Growth Story The Market CES 280 ( 17% Coverage) Mainland Equities in Mainland China and HK* CES 120 ( 40% Market Coverage) CES 120 ( 40% Coverage) CES 280 ( 17% Market Coverage) CES 120 + CES 280 ( 57% Market Coverage) offer investors different segment exposure *As of 31 Mar 2016, more than 95 per cent of market capitalisation of Mainland equities was listed in the Mainland China and Hong Kong markets (excluding ADRs and dual-listed companies). Sources: HKEX, SSE, SZSE, Wind, CSI. 14
CES 280 captures cross-border growth opportunities The CES China 280 Index (CES 280) is designed to supplement the large-cap CES China 120 Index (CES 120). CES 280 is a free float-adjusted market capitalisation weighted index that tracks performance of large to mid-cap Mainland companies (A shares, H shares, Red chips and Mainland Private Enterprises) listed on Shanghai Stock Exchange, Shenzhen Stock Exchange and HKEx. CES 280 is launched on 7 July 2014 at a base level of 2,000 and base date of 31 December 2004. At present, CES 280 and CES 120 together cover about 70 per cent of the market capitalisation of the Mainland stocks listed in the three markets. MV Coverage 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% CES 120 Smallest MV: RMB31.6 bn No. of A Shares: 80 No. of HK Stocks:40 CES 280 Smallest MV: RMB8.6 bn No. of A Shares:200 No. of HK Stocks:80 1 251 501 751 1001 1251 No. of Stocks Sources: CSI, CSEC. Data as of 31 Mar 2016. 15
Cross-border Large/Mid Cap Index: CES 280 2000 1800 1600 1400 1200 1000 800 2000 1800 1600 1400 1200 1000 800 600 600 10/31/2011 10/31/2012 10/31/2013 10/31/2014 10/31/2015 10/31/2016 CES 120 CES 280 Return Volatility 1 year 3 years 5 years 1 year 3 years 5 years CES 120 3.16% 26.28% 25.12% 18.26% 21.72% 20.23% CES 280-8.78% 26.38% 14.74% 21.64% 24.38% 22.36% Source: CESC, as at Oct 31, 2016. Volatility is based on Daily Return, with annualized basis of 250 trading days. 16
CES Cross Border Index Series A Shares CES 280 200 TOP 5 Constituents 600518 KANGMEI PHARM 002450 KANGDEXIN 601939 CONSTR BANK 601009 BANK OF NANJING 601377 INDUSTRIAL SEC CES 120 HK Shares 80 40 TOP 5 Constituents 1988 MINSHENG BANK 2018 AAC TECH 1088 CHINA SHENHUA 1099 SINOPHARM 2313 SHENZHOU INTL 80 TOP 5 Constituents 601318 CN PING AN 600016 MINSHENG BANK 601166 IND BANK 00002 VANKE 600036 MERCHANTS TOP 5 Constituents 700 TENCENT 941 CHINA MOBILE 939 CCB 1398 ICBC 3988 BOC Top 10 Constituents CES 280 CES 120 Yield (%) 1.61 3.19 PE Ratio (Times) 19.13 9.69 Index Free Float MV (CNY Bn) 4,921.69 8,682.74 Market Value Coverage (%) 16.39% 40.00% Market Turnover Coverage (%) 15.05% 16.51% Source: CESC, as of Sep 30 2016 17
CES 280: More Balanced Industry Distribution 35.00% 30.00% 25.00% CES 120 CES 280 20.00% 15.00% 10.00% 5.00% 0.00% Source: CESC, as of Sep 30 2016 18
CES Index Series A-shares CES CHINA A80 INDEX CES CHINA 120 INDEX CES CHINA HK MAINLAND INDEX HK shares CES CHINA 280 INDEX CES STOCK CONNECT 300 INDEX CES STOCK CONNECT HK SELECT 100 CES GAMING TOP 10 CES P CHIP INDEX 19
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