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On September 4th, FTSE Russell announced the quarterly review changes for the FTSE China 50 Index, FTSE China A50 Index, FTSE China A150 Index, FTSE China A200 Index, and FTSE China A400 Index. Among these, the FTSE China A50 Index will include China National Nuclear Corporation and Huaneng Hydropower, while removing China Duty Free and Golden Dragon Fish. These changes will officially take effect after the market close on Friday, September 20, 2024.

The FTSE China A50 Index is an important reference for overseas investors. Historical experience with index adjustments suggests that changes to the FTSE China A50 Index often attract a significant amount of passive foreign capital.

Two power stocks are "selected"

The FTSE China A50 Index is compiled and published by FTSE Russell. Comprising the 50 largest market capitalization stocks from the Shanghai and Shenzhen Stock Exchanges, it reflects the performance of the most influential top 50 listed companies in the A-share market. As a result, many international investors regard this index as an accurate gauge of the Chinese market.

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Looking at the historical changes in the index components, the logic behind the adjustments is primarily due to changes in market capitalization, which means it is highly related to the company's stock performance over a certain period.

In this quarterly adjustment, the FTSE China A50 Index will include China National Nuclear Corporation and Huaneng Hydropower, while removing China Duty Free and Golden Dragon Fish.

Taking Huaneng Hydropower, which is about to be included in the index as an example, as of the market close on September 4th, the company's stock price was reported at 10.27 yuan per share, with a year-to-date increase of 39.26%, far exceeding the performance of the broader market over the same period. The latest total market capitalization has risen to 193.9 billion yuan.

Additionally, Huaneng Hydropower's performance this year has been quite impressive. The company achieved a total operating income of 11.88 billion yuan in the first half of this year, a year-on-year increase of 13.1%; the net profit attributable to the parent company was 4.169 billion yuan, a year-on-year increase of 22.47%. The stock's year-to-date increase was 27.68%, and the latest market value rose to 194.9 billion yuan.

In contrast, China Duty Free and Golden Dragon Fish, which are being removed, have seen year-to-date declines of 28.37% and 23.68%, respectively, with their latest market values dropping to 118.8 billion yuan and 137.7 billion yuan.

At the same time, the FTSE China A50 Index's list of potential replacement stocks will include China Coal Energy, China Shipbuilding, China United Network Communications, North HuaChuang, and Luoyang Molybdenum, until the next quarter's component stock review. If one or more component stocks are removed, the potential replacement stocks will be used. These individual stocks have also generally achieved good increases this year, with China Coal Energy and Luoyang Molybdenum recording year-to-date gains of 44.26% and 35.70%, respectively.Short-term Correction in Power and Energy Stocks

From the adjustment results of the aforementioned FTSE China A50 Index, the stocks that have been included or selected are generally power and energy stocks.

This year, the power and energy sector has shown strong overall performance. Even though there has been a correction since July, the Wind Power Industry Index still rose by 13.1% this year. Among them, China General Nuclear Power Corporation's year-to-date increase reached as high as 44.38%, with China National Nuclear Corporation, Zhejiang Energy Power, and Anhui Energy Power, among others, seeing year-to-date gains exceeding 30%.

Lu Zhiming, the fund manager of GF Power ETF, believes that the rise in the power industry stems from two factors: first, the increase in coal prices has led to an increase in profit expectations; second, the profitability certainty and stability of the industry have been enhanced under the new power system. In terms of coal prices, the average settlement price of Qinhuangdao Port's thermal coal (Q5500) in the first half of 2024 was 874.88 yuan/ton, a decrease of 145.91 yuan/ton compared to the average price in the first half of 2023. With the implementation of capacity-based electricity pricing, the profitability stability of thermal power has been enhanced. Additionally, asset classes like hydropower, which are akin to bond assets, have been jointly driven by the downward trend in U.S. Treasury rates and an increase in dividend yields, leading to a noticeable increase in the power sector.

Regarding the recent correction, Shen Li, the fund manager of Caitong Multi-Strategy Selection Mixed (LOF), believes that on one hand, it is due to some high-dividend stocks experiencing a short-term withdrawal of transactional investors following the completion of annual dividend payments, resulting in a phased correction in the dividend sector. On the other hand, it is also because the macro environment has experienced some fluctuations recently, affecting the stability of the performance of some dividend assets.

For example, weak coal prices have impacted the future profit expectations of coal enterprises; the growth of hydropower and nuclear power further squeezes the market share of thermal power, with expectations for thermal power generation being revised downward. However, some dividend assets have withstood macro pressures and demonstrated resilience, such as nuclear and hydropower assets.

Looking ahead, the public utilities team at Zheshang Securities believes that the market should still focus on the three more certain tracks of thermal power, hydropower, and nuclear power. Currently, thermal power has already received multi-dimensional benefits in terms of cost (small fluctuations in the bottom range of coal prices), demand (release of construction and flexibility transformation demand), and policy (capacity-based electricity pricing policy as a safety net). Hydropower's own cash flow attributes and dividend capacity give it strong risk resistance, and with improved water conditions, profits are expected to recover. The start of nuclear power is expected to maintain high enthusiasm, with stable electricity prices and limited impact of uranium price fluctuations on costs, supporting the stable growth of nuclear power.