Summary of Key Points from the Conference Call Industry Overview - The focus is on the Southbound Stock Connect program, which facilitates trading of Hong Kong-listed stocks by mainland Chinese investors. The program's dynamics significantly impact liquidity and ownership composition in the Hong Kong market. Core Insights and Arguments 1. **MSSBT V2 Launch**: The introduction of MSSBT V2 aims to enhance alpha generation by incorporating both Southbound deletions and inclusions, with a backtested hit ratio of 93% and an average return of 25% from a two-way trading strategy [1][4][18]. 2. **Record Southbound Inflows**: Southbound inflows reached a record high of US$170 billion in 2025, continuing strong momentum into 2026, which has increased the importance of Southbound flows for Hong Kong-listed stocks [2][18]. 3. **Impact of Deletions**: Stocks deleted from the Southbound program typically experience a significant turnover and liquidity drop, with an average daily turnover decline of 44% and a 28% unwinding of Southbound ownership in the 30 days following deletion [3][24]. 4. **Forecast for March 2026**: The upcoming Southbound review is expected to result in 44 deletions and 25 inclusions. Investors are advised to position themselves accordingly by entering trades approximately 30 days prior to the official rebalancing date [5][8]. 5. **Historical Performance of Deleted Stocks**: Over 70% of stocks deleted from the Southbound channel experienced an average price drop of 11% in the 30 days leading up to deletion, indicating a pattern of negative price momentum associated with deletions [10][30]. Additional Important Content 1. **Trading Strategy**: The MSSBT V2 strategy is designed to capitalize on both the positive impacts of stock inclusions and the negative impacts of deletions, leveraging the liquidity dynamics of the Southbound channel [21][34]. 2. **Investor Behavior**: Deletions from the Southbound eligibility list often lead to reduced liquidity and investor concerns, prompting many to sell their holdings to mitigate risks associated with diminished trading activity [28][29]. 3. **Technical Details of Deletions**: The deletion process is aligned with the Hang Seng Composite Index (HSCI) review schedule, with specific criteria determining which stocks are eligible for Southbound trading [36][39]. Conclusion The Southbound Stock Connect program remains a critical factor for Hong Kong-listed stocks, with significant implications for liquidity and investor strategy. The MSSBT V2 model aims to optimize returns by effectively navigating the complexities of stock inclusions and deletions, providing investors with actionable insights for upcoming market adjustments.

Summary of Morgan Stanley Southbound Inclusion Trading Strategy Conference Call Industry Overview - The conference focuses on the Southbound Stock Connect (SB) trading strategy, which is a significant liquidity source for the Hong Kong equity market, particularly as it relates to mainland Chinese stocks. Key Points and Arguments 1. **Launch of MSSBT**: Morgan Stanley has launched the Morgan Stanley Southbound Eligibility Trading Strategy (MSSBT), a proprietary model designed to predict stocks for Southbound inclusion and capitalize on their price momentum ahead of the event, conducted semi-annually [1][4][21]. 2. **Historical Performance**: Stocks included in Southbound Stock Connect have historically shown strong performance, generating average absolute returns of 1.6-3.7% and alpha of 2.4-5.2% relative to the Hang Seng Index in the 15- and 30-day periods leading up to inclusion [2][15][49]. 3. **Liquidity Trends**: Southbound trading now accounts for over one-third of daily turnover on the Hong Kong Main Board, with SB holdings representing approximately 15% of the free float market capitalization of eligible stocks, indicating a significant increase of over 30% since 2024 [12][19][29][36]. 4. **Upcoming Inclusion Forecast**: For the September 2025 inclusion, 19 candidates across seven sectors have been identified, with notable companies including CaoCao Inc. (2643.HK) and Duality Biotherapeutics (9606.HK) [6][8][14]. 5. **Back-Testing Results**: The MSSBT model has achieved an average hit ratio of 85% over the last four semi-annual inclusion cycles, with pro forma portfolios constructed based on MSSBT forecasts yielding average returns of 10.1% in absolute terms and 7.4% relative to the Hang Seng Index within 30 days prior to inclusion [5][25][27]. 6. **Sector Performance**: Certain sectors, such as Telecoms, Energy, and Health Care, have seen Southbound ownership exceed 40% of total sector free float market capitalization, highlighting the varying impact of SB flows across different industries [38][41][42]. Additional Important Insights - **Investment Opportunities**: The growing A-H dual listing universe and exclusive investment opportunities in sectors like Internet and New Consumption are expected to keep Hong Kong attractive for Southbound investments [12]. - **Market Dynamics**: The increasing prominence of Southbound flows is transforming the ownership structure of stocks in Hong Kong, providing liquidity support and influencing price movements, particularly for stocks with solid fundamentals [38][39]. - **Performance of Newly Added Stocks**: Stocks added to the SB channel tend to outperform the broader market, with an average price increase of 3.7% and 1.6% in the 30 and 15 days prior to inclusion, respectively [49]. This summary encapsulates the critical insights and data points discussed during the conference call, providing a comprehensive overview of the Southbound trading strategy and its implications for the Hong Kong equity market.