Methodology Change | Solactive China Healthcare Disruption Index | Effective Date 15/02/2024

Today, on the 09/02/2024, Solactive announces the following changes to the methodology of the following indices (the ‘Affected Indices’):

Rationale  for  Methodology  Change

The indices aim to represent Hong Kong listed companies that have business operations in various innovative fields in the healthcare sector.

As part of our annual index methodology review, Solactive has decided to apply some adjustments to the respective indices to further enhance the alignment of the selection process with its scope.

These adjustments will realign the industry selection in the index, as we see that various subindustries in China healthcare segment are going through some notable changes and the index should catch those sectors and names. There are some industry players which are undergoing a process of business innovation to create new revenue streams and growth opportunities which we did not yet capture. For example, traditional pharmaceutical companies are spending more and more of their R&D budget on innovative drugs rather than generics drugs. Additionally, more pharmaceutical companies are specializing in certain disease areas. They have deep know-how within their specific realm compared to diversified pharma, and they have the potential to grow, despite their smaller scale now. Therefore, the new methodology fine tunes the structure of pharmaceutical sector to include them.  

In this scope, Solactive has decided to exclude the subindustry Pharmacies and Drug Stores from its eligible industry universe as it is not deemed to correspond to the disruptive element of the scope as well as the other sectors. In terms of additions, the eligible universe would now encompass Pharmaceuticals: Other, Chemicals: Specialty, and Pharmaceuticals: Generic, which were previously excluded from the index universe. Furthermore, Wholesale/Generic Pharmaceuticals Distributors would be included for the first time, recognizing their significant contribution to the healthcare segment’s value chain moving forward.

Solactive has also decided to make a distinction between Core and Non-Core companies based on their business focus and solidify the exposure to the first category.

Additionally, we limit the weights of certain group of companies to reflect their lower liquidity. Since the overall liquidity in Hong Kong stock market is shrinking, limiting the number and representation of low liquidity names would be a reasonable adjustment for the index to guarantee its replicability. We do that by dividing companies into Focus and Non-Focus Players, which in turn are mainly distinguished based on their market capitalization.

Lastly, the IPO Review process will be removed from the methodology as it no longer carries any significance to the index strategy and might only cause additional turnover.

These changes are also in line with the original index strategy, i.e. to represent companies that have business operations in various innovative fields in the healthcare sector.

Changes to the Index Guideline

Section 1.1. SCOPE OF THE INDEX

From:

“[….]

The indices are adjusted quarterly in February, May, August and November. Additionally, IPOs can be included on a weekly basis if they meet all criteria outlined in the relevant sections of this document.

[…]”

To:

“[…]

Quarterly

[…]”

Section 2. INDEX SELECTION

From:

On each SELECTION DAY and IPO REVIEW DAY, the INDEX ADMINISTRATOR will revise the composition of the INDEX.

To:

On each SELECTION DAY, the INDEX ADMINISTRATOR will revise the composition of the INDEX.

Section 2.1. INDEX UNIVERSE REQUIREMENTS

From:

“[…]

5)            Only one share class of each company is eligible for inclusion in the INDEX UNIVERSE. The eligible share class is the share class with the higher minimum AVERAGE DAILY VALUE TRADED over the last two months including the SELECTION DAY or IPO REVIEW DATE.

6)            Companies must be classified under any of the following economies, sectors or industries based on FactSet and the FactSet Revere Business Industry Classification System (“RBICS”):

1. FactSet Industry:
2. Biotechnology
3. Medical Specialties
4. RBICS Sector:
5. Biopharmaceuticals
6. Healthcare Equipment
7. RBICS Industry:
8. Internet Pharmacies and Drug Retail
9. Diversified Development and Manufacturing Services

iii.            Drug Discovery Services

1. Pharmacies and Drug Stores: Companies from this subindustry must contain in its business description from FactSet the keyword “online”.
2. Companies with an economy classification of “Technology” under FactSet and “Healthcare” under RBICS.
3. Companies with an economy classification of “Healthcare” under FactSet and “Technology” under RBICS.

7)            Companies must not be classified under any of the following economies, sectors and industries based on FactSet and RBICS:

1. FactSet Industry:
2. Pharmaceuticals: Other
3. Chemicals: Specialty

iii.            Pharmaceuticals: Generic

1. Companies with an industry classification of “Medical Specialties” under FactSet and a sector classification of “Healthcare Services” under RBICS.
2. Companies with an industry classification of “Pharmaceuticals: Major” under FactSet and a sector classification of “Healthcare Equipment” under RBICS.
3. Companies with an industry classification of “Biotechnology” under FactSet and a sector classification of “Healthcare Equipment” under RBICS.

The determination of the INDEX UNIVERSE is fully rule-based and the INDEX ADMINISTRATOR cannot make any discretionary decisions.

To:

“[…]
5)            Only one share class of each company is eligible for inclusion in the INDEX UNIVERSE. The eligible share class is the share class with the higher minimum AVERAGE DAILY VALUE TRADED over the last two months including the SELECTION DAY

The determination of the INDEX UNIVERSE is fully rule-based and the INDEX ADMINISTRATOR cannot make any discretionary decisions.

Section 2.2. SELECTION OF THE INDEX COMPONENTS

From:

Based on the INDEX UNIVERSE, the initial composition of the INDEX as well as any selection for an ordinary rebalance is determined on the SELECTION DAY in accordance with the following rules (the “INDEX COMPONENT REQUIREMENTS“):

1)             All eligible securities are ranked based on their TOTAL MARKET CAPITALIZATION in a descending order. The top 35 ranked securities are selected for index inclusion. In case less than 35 securities are eligible, all eligible securities are selected and the INDEX consists of less than 35 INDEX CONSTITUENTS.

The selection of the INDEX COMPONENTS is fully rule-based and the INDEX ADMINISTRATOR cannot make any discretionary decision.

To:

“[…]

Based on the INDEX UNIVERSE, the initial composition of the INDEX as well as any selection for an ordinary rebalance is determined on the SELECTION DAY in accordance with the following rules (the “INDEX COMPONENT REQUIREMENTS“):

1)             All securities are selected that are classified as CORE constituent as defined in Appendix 7.1, even if there are more than 30 companies.

2)            If the INDEX comprises fewer than 30 stocks, NON-CORE constituents will be added to the INDEX COMPONENTS based on TOTAL MARKET CAPITALIZATION ranking in descending order. Stock selection will cease once the number of INDEX COMPONENTS reaches 30. If the INDEX still consists of fewer than 30 stocks, it will contain fewer than 30 constituents.

The selection of the INDEX COMPONENTS is fully rule-based and the INDEX ADMINISTRATOR cannot make any discretionary decision.

[…]”

Section 2.3. WEIGHTING OF INDEX COMPONENTS

From:

On each SELECTION DAY each INDEX COMPONENT is assigned a weight according to TOTAL MARKET CAPITALIZATION. Then, a weight cap is applied for each INDEX COMPONENT by re-distributing any weight which is larger than 8.0% to the other INDEX COMPONENT proportionally in an iterative manner.

If an IPO meets the criteria outlined in section 3.1 ORDINARY REBALANCE on the IPO REVIEW DATE, each INDEX COMPONENT is assigned a weight according to TOTAL MARKET CAPITALIZATION as of IPO REVIEW DATE. Then, a weight cap is applied for each INDEX COMPONENT by re-distributing any weight which is larger than 8.0% to the other INDEX COMPONENT proportionally in an iterative manner.

To:

On each Selection Day each Index Component is categorized into its designated Focus Level, a classification that holds significance in the subsequent determination of its weighting.

The specific categorization for selected index constituents from point 2.2 can be inferred from the table below:

On each Selection Day each Index Component is assigned a weight according to Total Market Capitalization. Then the following steps are applied:

• The sum of the weight of Focus Players sums up to 95%.
• The sum of the weight of Non-Focus Players sums up to 5%.
• The maximum weight of an Focus Player is 8%.
• The maximum weight of an Non-Focus Player is 0.50%.

The excess weight that results from implementing these constraints is redistributed proportionally in an iterative manner within its Focus Level, such that none of the above constraints are breached.

Section 3.1. ORDINARY REBALANCE

Removal of paragraph related to IPO REVIEW and IPO ADJUSTMENT.

Section 4.3. ADJUSTMENTS

Removal of IPO ADJUSTMENT DAY.

Section 6. DEFINITIONS

Share Class Market Capitalization-  Removal of IPO REVIEW DATE.

Total Market Capitalization- Removal of IPO REVIEW DATE.

Trading Day- Removal of IPO ADJUSTMENT DAY.

Following new definitions will be added:

“Core Type” shall have the meaning as defined in the Section 7.1 “Index Basket Classification”.

“Gross Profit Margin”  is calculated as Gross Income divided by Net Sales or Revenue.

“Index Basket” shall have the meaning as defined in the Section 7.1 “Index Basket Classification”.

“Focus Level” is composed of Focus Players and Non-Focus Players.

“Turnover Ratio” is calculated as the Average Daily Value Traded over the last 2 months prior to and including the Selection Day, divided by the Total Market Capitalization.

Following old definitions will be removed:

“IPO Adjustment Day” is every Friday. If that day is not a Trading Day, the IPO Adjustment Day will be the following Trading Day.

“IPO Review Day” is 3 Business Days before the IPO Adjustment Day.

APPENDIX will be added:

7     Appendix

7.1.         Index Basket Classifications

A company is assigned to a Core Type and Index Basket through the combined use of the RBICS and FactSet classifications. If there are multiple occurrences of either RBICS and/or FactSet within a single row, it indicates that the respective industry classifications have to be collectively satisfied in order for a company to be included in the respective Core Type and Index Basket. An Index Basket may potentially include multiple classifications form either RBICS and/or FactSet.

Furthermore, one company cannot be included in multiple Index Basket. If a stock is eligible for inclusion in multiple Index Baskets, it will only be included in the Index Basket containing the industry with the highest granularity, where RBICS Subindustry represents the highest granularity level. In case multiple industry classifications are necessary to assign a company to an Index Basket, the industry classification within this Index Basket with the lowest granularity will be taken for reference.

Defined terms used in this announcement, but not defined herein, have the meaning assigned to them in the respective index guideline of the Affected Indices. The amended version of the index guideline will be available on the effective date