Q1: Can you brief us on the background of compiling the SSE STAR Market Constituent 50 Index?
A: Launching the Science and Technology Innovation Board (SSE STAR Market) and piloting the registration-based IPO system are the basic institutional arrangements for deepening the reform of the capital market. After nearly a year of development, the SSE STAR Market has grown significantly in size, which is conducive to including more constituent stocksthat are highly typical in terms of market value with adequate liquidity, so as to improve the representation of the index. As of the end of May, there were 105 listed companies with a total market value of RMB1.6 trillion. With the concentration of a group of enterprises with key and core technologies and outstanding capacity for scientific and technological innovation, the importance of the market has been increasingly highlighted. Launching the SSE STAR Market index at the current stage is an important measure to adapt to the market development, advance the market construction, improve market functions and enrich the system of multi-level market indexeson the SSE.
Considering that at present the influential and highly-recognized indexes in the world are mainly constituentindexes, and the constituentindexes are used to reflect the market developments, in order to concentratedly reflect the performance of the stock prices of the core companieslistedon the SSE STAR Market, the SSE will launch the “SSE STAR Market 50 Index”,and the shortened name is “STAR 50”. As the first index to reflect the price performance of the securities on the SSE STAR Market, the "STAR 50" index to be launched willofferthe investors an instrument to objectively represent the evaluation benchmarks for market and performance, and providean underlying asset for the index-based investment products to track. The "STAR 50" index is a price index, and the supportive "STAR 50" Total Income Index and Net Income Index will also be released to reflect the SSE STAR Market from more angles.
Q2: Can you brief us on the methodology of the “STAR 50” index?
A: The construction of the "STAR 50" index strictly adheres to objectivity and science-based approach. All the links and elements involved have been carefully studiedon the basis of the experience at home and abroad, the characteristics of the SSE STAR Market and other factors, so as to achieve the balance between theinternational practice and the actual conditions of the market. The methodology of the index involves the index universe, selection of constituents, weighting mode, adjustment of constituents, etc. The details of the methodology are as follows:
First of all, the methodology involves the index universe. The SSE STAR Market allows the listing of the depositary receipts issued by red-chip companies and the companies with weighted voting rights (WVR), which is a major institutional innovation in the domestic capital market. From the perspective of the constituents of representative indexes in the world, in addition to ordinary shares, some component indexes also absorb the only depository receipt listed on the market, such as the Nasdaq 100 index. In recent years, index providers have generally inclined to include the companies with WVR. For example, since March 2019, the MSCI Global Investable Market Indexes (GIMI)have been able to includethe companies with WVR, andin May 2020, the Hang Seng Index incorporate the stocks of the companies with WVR into the range of constituent selection.After drawing on the mature experience in the world and considering the characteristics of the SSE STAR Market, in addition to the common stocks,the "STAR 50" index absorbs the listed depository receipts on the SSE STAR Market issued by red-chip companies and the stocks of companies with WVR into the index universe, so as to enhance the representativeness of the index.
Secondly, the methodology involves the time for the new stocks to be included. In accordance with the market characteristics in the homecountry and region, the representative component indexesin the world usually make the new stocks eligible to be included in the index universe only after they have experienced certain pricing gamein the market. For example, the S&P 500 index requires that the new stocks should be listed for at least 12 months before winning the qualification for the inclusion. In order to reflect the representative role of the companies with large market capitalization in the index in a timely manner, differentiated schedules for the inclusionareusually set up. For example, the Hang Seng Index arranges the inclusion schedules of 3 months, 6 months, 12 months, 18 months and 24 months according to the sizes of market value. In order to make the “STAR 50” index represent the market accurately, with the actual developments also taken into account, a two-stage approach will be taken: at the current stage, the new securities on the SSE STAR Market will be included in the index universe after being listed for 6 months, and when the number of the securities listed for 12 months on SSE STAR Market reaches 100 to 150, the listing time requirement will be adjusted to at least 12 months; at the same time, differentiated schedules for the inclusion will be set for the securities ranking top 3 and top 5 on the SSE STAR Market in terms of the average daily total market value since the listing.
Thirdly, the methodology involves the mode of constituent selection. Size of market value and liquidity are the most basic and core standards of the representative component indexes in the world. After drawing on the experience of representative component indexes at home and abroad and considering the actual developments of the SSE STAR Market, with the securities in the index universe ranking bottom 10% in terms of the average daily trading value over the past year excluded, the securities ranking top 50 for the average daily total market value will be selected as the constituents of the "STAR 50" index, so as to ensure the liquidity of the constituentsas well as achieve better representativeness.
Fourthly, the methodology involves the weighting mode. By drawing on the mainstream index methodologies, the free-float share weighting is adopted. At the same time, the international representative component indexes usually set weight limits for individual stocks. For example, the Hang Seng Index and STOXX EURO 50 stipulate that the weight of individual stocks should not exceed 10%, and the Nasdaq 100 index requires that the sum of the weights of individual stocks with a weight of more than 4.5% should not exceed 48%. The "STAR 50" index sets a 10% weight limit for a single constituent, and the sum of the weights of the top 5constituentsshall not be more than 40%.
Fifthly, the methodology involves the adjustmentof constituents. According to the principles of stability of constituentsand dynamic tracking, a quarterly periodic adjustment mechanism will be set up to reflect market changes in a timely manner. The quarterly periodic adjustments take effect as of the next trading day after the second Friday of March, June, September and December each year. The buffer zone and the adjustmentproportion limit will also be set to ensure the stability of the index and reduce the cost of tracking the index caused by frequent changes in the constituents. In addition, a temporary adjustment mechanism will be established for delisting, delisting risk warnings and other circumstances.
Q3: Can you brief us on the characteristics of the "STAR 50" index?
A: Generally,the "STAR 50" index shows the following characteristics. First of all, the index is adequately representative. As of the end of May, the 50 constituents cover about 61% of the total market value, and in terms of research and development expenses, operating income, net profit attributable to shareholders of the parent company, and net cash flow generated from operating activities,the coverage ratiosall exceed 60%.Secondly, the index is highly characterized by the industries. The 50 constituents are concentrated in the strategic emerging industries such as new-generation information technology, biomedicine and high-end equipment, highlighting the innovation-driven characteristic of the structure of the industries on the SSE STAR Market. Thirdly, the attribute of sci-tech innovation is outstanding. The average R&D expenditure of the 50 constituent companies accounts for 13% of the operating income. High proportions of R&D investment boosted thegrowth in performance. Among the companies, in 2019, the operating income increased by 13.4%year-on-year, and the net profit grew by 28.8% year-on-year. There were 4 companies posting a growth rate of over 50% in operating income, with 12 companies recording a growth rate of 30% to 50% and 20% to 30% for 10 enterprises. In the future, with the number and sizes of the companies listed on the SSE STAR Market increasing, the index will include more listed companies on the board that are highly representative with significant market influence, so as to further enhance theinvestment value of the index.
Q4: When will the stocks and depositary receipts listed on the SSE STAR Market be included in the SSE Composite Index and the SSE’score component indexes?
A: Qualified SSE STAR Market-listed stocks and depositary receipts issued by red-chip companies will be included in the SSE Composite Index in accordance with the revised methodology for the index. Going forward, the SSE will fully listen to the opinionsin the market, and after the considerationof the expert committee, the specific arrangements will be made for the SSE STAR Market-listed stocksand depository receipts issued by the red-chip companies to be included in the universes of the SSE core component indexes (such as SSE 50, SSE 180 and SSE 380).
Q5: What are the arrangements for the display of the trading amount (volume) for the "STAR 50" index?
A: Asthe first index representing the SSE STAR Market, the "STAR 50" index provides important reference for investors to observe the market. The trading amount (volume)displayed for the indexwill bethat of allsecuritieson the SSE STAR Market, so as to facilitate investors’ observation of the overall situation of the board.
Q6: Can you brief us on the process of publishing the "STAR 50" index?
A: In accordance with established practice, the "STAR 50" index will announce the index code and abbreviation to the market through the market data system 10 trading days in advance. After the market closing on July 22, 2020, the historical data of the "STAR 50" index will be released, and on July 23,the real-time market data will be officiallypublished. The specific content is subject to the final display of the market datavendors.