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MSCI will include Chinese ADRs into its indices, a key positive to US-listed Chinese shares. Tech will be the biggest beneficiary with BABA, BIDU and CTRP being the three largest. Short-term trading idea: Long BABA and BIDU. Long-term fundamentals continue to favor BABA over BIDU. MSCI announced the details involving the inclusion of Chinese ADRs to its indices. This is significant in that it marks the first time the ADRs are being included in MSCI indices. Overall, 14 Chinese ADRs will be included through two rounds, with the first starting on November 30th and the second starting on June 1st of 2016. This inclusion is significant in several ways: First, the inclusion into the MSCI indices allows these ADRs to be noticed by large fund managers who can only invest in a particular index, thereby allowing them to benefit from the positive fund flows. Second, the inclusion could potentially pave the way for Chinese domestic A-shares to be included in the index. Large cap Chinese ADRs are the biggest beneficiaries of this decision, so companies such as Alibaba (NYSE: BABA ), Baidu (NASDAQ: BIDU ) and Ctrip (NASDAQ: CTRP ) could see further fund flows into these stocks. Among the three largest ADRs to be included in the indices, I am positive on BABA given its attractive near- to medium-term outlook (see – Alibaba: The Best Remains The Best ) and CTRP given its industry consolidation ( Baidu And Ctrip: Tie-Up On O2O ). I am least positive on BIDU given its weaker position in the fast growing mobile payment and O2O space relative to its rivals ( Baidu: Flying Against The Bears ). Looking at the companies to be included in the MSCI China Index, it is clear that internet is the biggest beneficiary, accounting for 30% of the index. This is the first time in which a private enterprise such as BABA, rather than a state-owned enterprise (SOE), is the largest company. This also shows the transformation of the Chinese economy where private enterprises are becoming increasingly important. On the other hand, the weight of SOEs will drop to 55% from 68%, a record low. Finally, China will account for 28% of the emerging market benchmark, an improvement from 24%. Alibaba is perhaps the biggest beneficiary of this decision, accounting for 40% of the inclusion, followed by BIDU that accounts for 27%. Ctrip, NetEase (NASDAQ: NTES ) and JD.com (NASDAQ: JD ) will account for 5-7% each, but BABA will remain the most relevant with 8% of the MSCI China Index, followed by BIDU at 5%. Together, they will take the 4th and the 8th spots in the MSCI Emerging Market Index. After this inclusion, funds tracking the MSCI Emerging Market Index will be the primary fund flows that drive these ADRs. For BABA, this represents roughly 25 days of its average daily volume, whereas it is 35 days for BIDU. For New Oriental (NYSE: EDU ), it is around 92 days of its trading volume, while TAL Education (NYSE: XRS ) and NetEase could see somewhere around 50 days. Conclusion, the inclusion of Chinese ADRs in the MSCI indices is a positive to most ADRs, particularly the large caps. For my short-term trading idea, I would overweight BABA and BIDU. However, long-term fundamentals continue to favor BABA over BIDU. Scalper1 News
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