1. Report Industry Investment Rating No information about the report industry investment rating is provided in the content. 2. Report's Core Viewpoints - The Hang Seng Biotech Index (HSHKBIO) consists of 50 constituent stocks with notable investment scarcity, and foreign investors hold strong pricing power, influencing the AH premium. The index is affected by factors such as U.S. bond yields, credit spreads, and market liquidity [9][11]. - The index shows different correlations and trends with various factors, including a negative correlation with U.S. Treasury yields, a similar trend with Moutai Basket and Ning Portfolio, a closer alignment with A - share healthcare indices, and better performance when credit spreads widen [101][114][126]. - The trading behavior of foreign capital impacts the AH premium from aspects such as substitution, risk appetite, sentiment, and market liquidity [179][188]. 3. Summary According to the Table of Contents 3.1 Introduction - **Three Major Healthcare Sector Indices in Hong Kong Stocks**: There are three major industry indices in the Hong Kong healthcare sector: the HS Healthcare Index (68 constituents), the HS Biotechnology Index (50 constituents), and the HS Innovative Drug Index (37 constituents). The first two have high long - term correlation, and the Biotech Index can more effectively track the leading Hong Kong healthcare stocks due to its quarterly rebalancing [21][25]. - **Focus on Drugs and Medical Devices**: Hong Kong pharmaceutical stocks have scarcity as many innovative biotech companies are listed there before the STAR Market. The Biotech Index focuses on innovative drugs, medical devices, and CXO, different from A - share listed pharmaceutical enterprises [26][33]. - **The Low Proportion of AH Shares**: By April 2025, 13 AH shares in the index accounted for 17% - 20% of the index weight. Except for WuXi AppTec, the AH premium of other AH shares is generally around 1.5 - 2.0, and it may climb above 2.0 during market declines [38][42]. 3.2 Pricing Power - **Capital Structure**: Foreign and Hong Kong capital hold a dominant position (61% - 80%) in the Hang Seng Biotech Index. Since 2023, foreign capital has been reducing holdings, leading to a passive increase in the proportion of Southbound Stock Connect. By the end of March 2025, domestic and Chinese - funded institutions' investment proportion rose to 30% [51][55]. - **Proportion of Foreign Capital's Holdings**: Foreign capital holds controlling stakes in most individual stocks in the Hong Kong pharmaceutical sector, mainly from Europe and the United States. In 2024, U.S. - based foreign capital rapidly reduced its holdings, and some equity was transferred to the Qatar Investment Authority [60][64]. - **Belonging of Pricing Power**: From 2021 to 2025, foreign institutional investors had strong pricing power over pharmaceutical stocks, with more than half of the individual stocks showing a correlation coefficient exceeding 0.5 between their stock prices and the proportion of foreign holdings. Based on foreign ownership fluctuations for market timing has a long - term alpha effect [75][86]. 3.3 Sector Rotations - **The Index is Negatively Correltated with the U.S. Treasury Yield**: The HS Biotech Index has a significant negative correlation (- 0.84) with the 10 - year U.S. Treasury yield. Since 2024, its correlation with long - term Chinese bond yields has strengthened [95][101]. - **The Index Moves in Tandem with Moutai Basket and Ning Portofolio**: The Hang Seng Biotech Index, Moutai Basket, and Ning Portfolio are all dominated by foreign capital, tied to U.S. Treasury yields. They peaked simultaneously in 2021, with different maximum drawdowns [108][114]. - **The Index Tracks A - Share Healthcare Indices More Closely**: The HS Biotech Index shows stronger alignment with A - share healthcare indices and has diverged from U.S. biotech indices since 2024. After 2024, its trajectory is mainly driven by China's economic expectations [120][126]. - **The Index Paradoxically Outperforms When Credit Spreads Widen**: Credit spreads typically expand during macro - economic deterioration or industry profit headwinds. Widening spreads imply a higher probability of interest - rate cuts, boosting biotech valuations [133][139]. - **Hang Seng Sector Rotation Signals**: When the 10 - year U.S. Treasury yield declines, the elasticity of Hong Kong's major broad - based indices is Biotech > HSTECH > HSI; in the interest - rate hike cycle, HSI and HSTECH have stronger excess returns. When the 10 - year CGB yield rises, it is suitable to overweight the Biotech Index [147][158]. 3.4 AH Premium - **AH Premium Rate: Negatively Correlated with the Index**: The average AH premium of 13 AH shares from September 2022 to March 2025 has a high negative correlation (- 0.90) with the index, which may be due to the high elasticity of biopharmaceutical stocks and the significant influence of foreign capital transactions [165][166]. - **AH Premium: The Trading Behavior of Foreign Capital**: The trading behavior of foreign capital affects the AH premium from four aspects: substitution (long - term deviation in AH premium after the launch of the Mainland - Hong Kong Stock Connect), risk appetite (higher U.S. Treasury yields lead to a higher AH premium), sentiment (negative correlation between warrant PCR ratio and AH premium), and market liquidity (lower Hong Kong stock liquidity leads to a higher AH premium) [174][179][188].