As the Hong Kong healthcare sector gains popularity, the innovative drug indices under the Hong Kong Stock Connect launched by Hang Seng and CSI have become focal points for investors. Although both indices belong to the innovative drug sector, their compilation logic and investment value exhibit significant differences:

Core Positioning Differences

The Hang Seng Hong Kong Stock Connect Innovative Drug Index focuses on the core segment of "pure innovative drug R&D," strictly screening biotech stocks under the Hang Seng Composite Index eligible for Stock Connect and excluding CXO outsourcing service providers. It selects the top 40 stocks based on business relevance scores and implements a buffer mechanism (excluding those below 48th rank and adding those above 32nd rank) to ensure the index reflects the performance of innovative drug R&D companies.

The CSI Hong Kong Stock Connect Innovative Drug Index has broader coverage, including companies across the entire innovative drug R&D and production chain listed on the HKEX with full Stock Connect eligibility. It only excludes stocks with average daily turnover below HKD 10 million and selects the top 50 by market capitalization, forming a "large-cap innovative drug portfolio" with scale advantages.

Industry and Constituent Sharpness Comparison
As of June 30, 2025 (Shenwan Level 2 classification), the two indices show some similarities in industry coverage and weight distribution:

• Industry Concentration:

  • Hang Seng Index: Chemical Pharmaceuticals (46.42%), Biological Products (46.27%), Healthcare Services (7.33%).

  • CSI Index: Biological Products (48.09%), Chemical Pharmaceuticals (44.53%), Healthcare Services (7.38%).

• Top Holdings: Both indices' top three holdings are Innovent Biologics, WuXi Biologics, and BeiGene, with combined weights near 30%. The overlap rate of their top 10 holdings is 90%, and the total weight of the top 10 holdings is 68.91% (Hang Seng) and 67.35% (CSI).

Multi-Dimensional Financial Comparison

1. Profitability: As of end-2023, the net profit growth rates were 19.6% (Hang Seng) and 11.8% (CSI); by end-2024, they were -7.5% and -19.3%, respectively (Wind weighted estimates).

2. Valuation: As of June 30, 2025, the PE-TTM ratios were 28.68 (Hang Seng) and 32.35 (CSI); PS ratios were 2.96 and 5.36, respectively.

3. Risk-Return Profile:

   • Hang Seng Index: 2025 YTD return of 60.87%, annualized return since 2020 of 0.62%, and Sharpe ratio of 0.16.

   • CSI Index: 2025 YTD return of 62.78%, annualized return since 2020 of 4.04%, and Sharpe ratio of 0.27.

Rule Revision Brings Excess Returns
On June 30, 2025, the Hang Seng Index revised its methodology to explicitly exclude companies involved in CXO (including CRO, CMO/CDMO).

The innovative drug industry chain covers "R&D (e.g., compound synthesis) - Production (chemical制剂) - Sales (to医疗机构)," while CXO firms only provide outsourced R&D, production, and commercialization services without bearing R&D risks or owning core IP.

Wind data shows that after excluding CXO, the Hang Seng Index's performance improved significantly:

• 2023: Revised version outperformed the original by 5.0%.

• 2024: Excess returns expanded to 7.0%.

Since 2024, the CXO sector has underperformed due to geopolitical disruptions to overseas orders, reduced downstream pharma R&D funding, and intensified competition eroding profits. By excluding CXO, the Hang Seng Index more purely captures the growth红利 of innovative drug R&D firms.

Market Environment Adaptation Strategies

• Aggressive Strategy: Prefer the Hang Seng Index to leverage high growth in R&D-focused firms, suitable for risk-tolerant investors bullish on biotech breakthroughs.

• Balanced Strategy: The CSI Index offers diversified exposure across the industry chain, suitable for long-term investors.

Related ETFs:

• Only 1 ETF tracks the Hang Seng Index: Hang Seng Innovative Drug ETF (159316), listed in March 2025, with a 0.60% annual fee.

• 2 ETFs track the CSI Index, both with >58% returns in H1 2025 and average fees of 0.60%/year.