A share market after MSCI inclusion Mar. 2018 Li Chen +86 10 66538641 | [email protected] Mar 2018 1 1: A-share Inclusion in MSCI indexes • MSCI will include 231 China large cap A shares in the MSCI Emerging Markets Index using a two- step inclusion process beginning June 2018. • An Index Inclusion Factor (IIF) of 2.5% and 5% will be applied to the FIF-adjusted market capitalisation of China A shares in the pro-forma MSCI China Index in June and August, respectively. Current Aug 2018 (Inclusion factor=5%) Weight # of Securities Weight # of securities MSCI China 152 383 A shares - 0 2.61% 231 MSCI EM 846 1,077 A shares - 0 0.82% 231 MSCI Asia ex-Japan 646 877 A shares - 0 0.96% 231 Source: Wind, data as of 07-Feb-2018 2 2.1: Fund inflow into the A-share market • We estimate $14.8 bn fund flow into the A-share market by August inclusion • The most heavily weighted stocks in the provisional index—Moutai, Ping An, China Merchant Bank, Industrial Bank, ICBC, etc.—will receive the largest fund flows Table: Top 20 stocks receiving the largest fund flows Fund flow into the stock 6M average daily Days to Security Ticker Security Name Index weight (bn RMB) turnover (bn RMB) trade 600519 CH Equity KWEICHOW MOUTAI A 0.04% 5.38 3.04 1.8 601318 CH Equity PING AN INS A 0.03% 4.84 6.36 0.8 600036 CH Equity CHINA MERCH BK 0.03% 4.19 1.78 2.4 601166 CH Equity INDUSTRIAL BANK A 0.02% 2.48 2.13 1.2 601398 CH Equity ICBC A 0.02% 2.41 1.62 1.5 600000 CH Equity SHANGHAI PUDONG 0.02% 2.37 0.78 3.0 000333 CH Equity MIDEA GROUP CO A 0.01% 2.16 1.73 1.2 002415 CH Equity HANGZHOU HIKVIS A 0.01% 2.10 1.36 1.6 000002 CH Equity CHINA VANKE CO A 0.01% 2.01 1.59 1.3 601668 CH Equity CHINA STATE CON A 0.01% 1.87 2.29 0.8 601328 CH Equity BANK OF COMMU A 0.01% 1.76 0.90 2.0 601766 CH Equity CRRC CORP A 0.01% 1.73 1.42 1.2 000858 CH Equity WULIANGYE YIBIN A 0.01% 1.69 2.15 0.8 601601 CH Equity CHINA PACIFIC A 0.01% 1.68 1.06 1.6 600016 CH Equity CHINA MINSHENG A 0.01% 1.67 0.93 1.8 600104 CH Equity SAIC MOTOR CORP A 0.01% 1.66 0.86 1.9 601288 CH Equity AGRI BANK OF CN A 0.01% 1.64 1.45 1.1 600900 CH Equity CHINA YANGTZE 0.01% 1.49 0.36 4.1 601988 CH Equity BANK OF CHINA A 0.01% 1.41 0.92 1.5 000001 CH Equity PING AN BANK CO A 0.01% 1.39 1.84 0.8 Source: Wind, data as of 07-Feb-2018 3 2.2: Some stocks could benefit in the short term • The stocks with a higher ratio of potential fund flow to average daily turnover may be short- term beneficiaries, especially those stocks in which foreign investors hold very small number of positions. Table: Top 20 stocks with the highest fund flow/daily turnover Fund flow into the 6M average daily Security Ticker Security Name Index weight Days to trade stock (bn RMB) turnover (bn RMB) 000046 CH Equity OCEANWIDE HLDGS 0.00% 0.21 0.03 8.1 603288 CH Equity FOSHAN HAITIAN 0.00% 0.73 0.14 5.3 600900 CH Equity CHINA YANGTZE 0.01% 1.49 0.36 4.1 000166 CH Equity SHENWAN HONGY 0.00% 0.61 0.19 3.3 600027 CH Equity HUADIAN POWER 0.00% 0.19 0.06 3.2 000027 CH Equity SHENZHEN ENERGY 0.00% 0.12 0.04 3.1 600023 CH Equity ZHEJIANG ZHENENG 0.00% 0.34 0.11 3.1 600000 CH Equity SHANGHAI PUDONG 0.02% 2.37 0.78 3.0 002411 CH Equity JIANGSU BICON 0.00% 0.16 0.06 3.0 000883 CH Equity HUBEI ENERGY 0.00% 0.13 0.04 2.9 600998 CH Equity JOINTOWN PHARMA 0.00% 0.19 0.07 2.8 601169 CH Equity BANK OF BEIJING 0.01% 1.00 0.39 2.6 600642 CH Equity SHENERGY CO 0.00% 0.17 0.07 2.5 601390 CH Equity CHINA RAIL GRP 0.01% 1.02 0.41 2.5 600221 CH Equity HAINAN AIRLINES 0.00% 0.33 0.14 2.4 600663 CH Equity SHANGHAI LUJIAZ 0.00% 0.20 0.08 2.4 601985 CH Equity CHINA NATL NUCL 0.00% 0.61 0.25 2.4 600011 CH Equity HUANENG POWER 0.00% 0.19 0.08 2.4 600036 CH Equity CHINA MERCH BK 0.03% 4.19 1.78 2.4 600637 CH Equity ORIENTAL PEARL 0.00% 0.26 0.11 2.3 Source: Wind, data as of 07-Feb-2018 4 3.1: Overseas investments through QFII, RQFII and stock connect keep rising • Stock connect, QFIIs and RQFIIs are three channels for foreign investors to buy A-share stocks • Overseas investment in the A-share market was approximately Rmb448 bn as of 3Q 2017, constituting 1% of A-share’s floating market cap 1.1% 500 1.0% 450 0.9% 400 350 0.8% 300 0.7% 250 0.6% 200 0.5% 150 0.4% 100 0.3% 50 0.2% - Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 2013 2013 2013 2013 2014 2014 2014 2014 2015 2015 2015 2015 2016 2016 2016 2016 2017 2017 2017 Overseas Investment (bn RMB) Overseas holdings % of A-share floating market cap Source: Wind, data as of 07-Feb-2018 5 3.2: QFII and RQFII are open to licensed investors • QFIIs and RQFIIs are open to licensed investors, allowing investors to invest in all the A-share stocks and participate in IPO subscriptions Ranked by market cap Ranked by as % of total Ticker Name Ticker Name held by QFII (Rmb mn) free-float stocks 3Q17 Changes 2Q17 3Q17 Changes 2Q17 601169.SS BJ Bank 18,571.9 (452.3) 19,024.1 603233.SS Dashenlin 34.1 600519.SS Kweichow Moutai Co., Ltd 13,546.0 224.8 11,184.4 601009.SS Bank of Nanjing 15.7 (0.2) 15.9 002142.SZ Bank of Ningbo 10,891.0 644.5 10,246.4 002142.SZ Bank of Ningbo 15.3 (0.0) 15.4 601009.SS Bank of Nanjing 10,028.7 (272.2) 10,300.9 601169.SS BJ Bank 13.6 (0.0) 13.6 000333.SZ Midea Group Co Ltd 8,235.2 352.6 7,882.6 002173.SZ Innovation Medic 8.4 1.5 6.9 000858.SZ Wuliangye Yibin Co., Ltd 4,654.3 (74.9) 3,888.2 002439.SZ Venustech 8.2 0.0 8.2 Hangzhou Hikvision Digital 002415.SZ 3,556.8 (470.4) 4,027.3 603866.SS Toly Bread 7.6 2.1 5.5 Technology Co., Ltd. Gree Electric Appliances Inc of 000651.SZ 3,472.3 (165.0) 2,077.3 600533.SS Chixia Dev 7.3 1.6 3.3 Zhuhai Jiangsu Hengrui Medicine Co. 600276.SS 2,692.5 1,018.6 1,673.9 002032.SZ Supor 7.1 0.1 7.0 Ltd Shanghai International Airport 600009.SS 2,592.3 19.9 2,136.4 000089.SZ Shenzhen Airport Co. 6.8 1.9 3.3 Co Jiangsu Yanghe Brewery Joint- 002304.SZ 2,493.1 194.0 1,180.6 300676.SZ BGI Genomics 6.6 stock Co., Ltd Shanghai International 600104.SS SAIC Motor Corp Ltd 2,168.3 67.6 2,100.7 600009.SS 6.2 (0.0) 5.2 Airport 600585.SS Anhui Conch Cement Co. Ltd. 1,905.1 234.0 1,671.0 002186.SZ QUANJUDE 6.2 (0.0) 0.3 601888.SS China Intl’ Travel Service 1,498.7 147.7 951.5 600779.SS SCSF 6.0 1.1 3.9 002032.SZ Supor 1,468.0 (104.0) 1,572.0 002831.SZ Yuto Packaging 5.9 Hangzhou Robam Appliances Co 002508.SZ 1,238.8 169.9 1,068.9 000796.SZ Hna-Caissa 5.4 Ltd 002008.SZ Han's Laser Technology Co., Ltd 1,219.7 81.0 313.1 300180.SZ Huafon Microfibr 5.3 1.6 3.7 Data as of 07-Feb-2018 600779.SS SCSF 1,218.6 553.6 468.4 000613.SZ Dadonghai 4.9 - 4.9 000089.SZ Shenzhen Airport Co. 1,208.7 290.8 634.4 300166.SZ BONC 4.6 0.2 2.2 600690.SS Qingdao Haier Co., Ltd. 1,164.8 1.4 1,163.4 002120.SZ YUNDA Corp. 4.4 (0.0) 4.4 Source: Wind, data as of 07-Feb-2018 6 3.3: Stock connect, a more flexible channel • Compared with the traditional channels such as QFIIs and RQFIIs, stock connect is more flexible in that it allows all foreign investors to trade A-shares on a daily basis without a pre-approved quota. The capital mobility is higher through the Connect, because it sets no lock-in period or other restrictions, other than a daily quota limit.