Midea and ZTO’s Hang Seng Inclusion: A Catalyst for Sector Rotation and Passive Wealth

The inclusion of Midea Group (0300.HK) and ZTO Express (2097.HK) in the Hang Seng Index on June 6, 2025, marks a pivotal shift in China’s equity landscape. These additions signal a strategic reweighting toward core industries—home appliances and logistics—amid escalating U.S.-China trade tensions. For investors, this is more than a technical adjustment: it’s a call to capitalize on sector rotation and the inevitable passive fund inflows that will follow. Let’s dissect why these stocks could outperform and how to position for this opportunity.

The Sector Rotation Play: China’s Resilient Core

The Hang Seng Index’s expansion to 85 constituents underscores a deliberate pivot toward sectors critical to China’s economic sovereignty. Midea, a global leader in home appliances, and ZTO, a logistics giant, represent industries where China holds indispensable competitive advantages.

• Midea: As trade tensions tighten, demand for affordable, high-quality appliances—whether for urban housing or rural electrification—is non-discretionary. Midea’s 0.33% weighting in the index reflects its status as a blue-chip growth engine, with stable margins and a dividend yield that outpaces peers.
• ZTO: Logistics is the backbone of China’s e-commerce boom, which remains a domestic growth pillar despite external headwinds. ZTO’s 0.44% weighting signals recognition of its operational scale and cost efficiency, even as its stock languishes at a 4.3% year-to-date decline (as of May 2025).

Passive Funds: The Fuel for Outperformance

Index inclusion is a self-fulfilling prophecy. When Midea and ZTO are added to the Hang Seng, passive funds tracking the benchmark must buy their shares to maintain index correlation. This creates a price floor and upward momentum, especially for smaller-cap constituents like ZTO.

Historical precedents are instructive. Take BYD’s (0968.HK) inclusion in the Hang Seng Tech Index in 2023: its weighting rose from 0.5% to 3%, coinciding with a 50% surge in its stock. While Midea and ZTO’s allocations are smaller, the mechanical buying from ETFs and index funds could amplify their valuations disproportionately.

Contrasting Valuations: Midea’s Stability vs. ZTO’s Undervaluation

While both stocks benefit from inclusion, their profiles differ:

Metric	Midea Group	ZTO Express
Yield (Dividend)	2.8% (stable)	N/A (reinvestment phase)
PE Ratio (2025E)	12x (undemanding)	10x (deep value)
Debt/Equity	0.4x (low leverage)	0.7x (moderate risk)

Midea’s defensive profile makes it ideal for long-term holdings, while ZTO’s lower valuation offers asymmetric upside. Investors should note: ZTO’s stock trades at a discount to its peers despite controlling 30% of China’s parcel market—a position that becomes more valuable as e-commerce recovers.

The BYD Paradox: A Blueprint for Resilience

BYD’s Tech Index inclusion in 2023 demonstrated how benchmark reweighting can unlock equity value. Like BYD, Midea and ZTO operate in sectors where China’s domestic demand insulates them from trade wars. This reweighting isn’t just about stocks—it’s about allocating capital to industries that define China’s economic future.

Actionable Strategy: Timing the Inflows

The effective date of June 6, 2025, is a critical entry point. Passive funds will begin accumulating shares ahead of the June 9 implementation, creating a buy-the-rumor, buy-the-news dynamic. Here’s how to play it:

1. Midea: Target a position at or below HK$75 (a 10% discount to its May 2025 price). Its stable cash flows and dividend yield offer downside protection.
2. ZTO: Aggressively accumulate below HK$140, aiming for a 20% upside as passive inflows and earnings recoveries align.

Conclusion: A New Weighting, a New Opportunity

Midea and ZTO’s inclusion in the Hang Seng Index isn’t just a technical adjustment—it’s a strategic endorsement of China’s core industries. With passive capital flows set to flood these stocks and valuations at compelling levels, investors ignoring this reweighting risk missing a defining trade. The question isn’t whether to act—it’s when.

For those ready to capitalize on sector rotation and mechanical fund flows, the time is now.

DISCLAIMER: This analysis is for informational purposes only. Always conduct your own research or consult a financial advisor before making investment decisions.