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Hong Kong selfie-app group Meitu given lesson in index membership

A selfie-app company learned the value of index membership on Wednesday, when shares in Meitu Inc dropped 9 per cent after MSCI said the Hong Kong listed stock would not, as previously announced, enter its China index in June.

MSCI had included Meitu in a list of planned index changes published Monday evening, and the sudden reversal highlights the power of index providers to direct money and attention towards little known companies.

Meitu has a mostly young and female following of over 450m active monthly users. The company makes most of its revenue from smartphone sales, but has no profits to date — and does not expect to make any this year or the next.

No explanation was given for the change until after markets closed, when MSCI released a statement suggesting the initial planned inclusion of Meitu was an error.

The company said “following additional analysis”, Meitu did not meet the index’s minimum free-float requirements, determined by the proportion of a company’s stock available to be bought and sold.

MSCI said this free-float did not include shares bought by investors before Meitu’s recent initial public offering, which cannot be sold in the first six months of trading.

So-called “lock-up” arrangements are common in Hong Kong, both for early investors and “cornerstone” investors willing to take a large position in an IPO, meaning newly issued shares can struggle to attract attention because of thin trading volumes.

“Applications for indexes are meticulously researched, so something very strange must have gone on,” said Will McFadden, head of equity sales at NSBO, a China-focused investment bank.

Meitu was valued at over $5.3bn after its December IPO, when it raised $639m from the sale of 12 per cent of its total shares. Of the shares offered, a quarter went to cornerstone investors.

As the six-month lock-up period for Meitu’s investors ends on June 13, it is possible MSCI will have to make a second U-turn at its next review of the China Index, a high profile collection of mainland Chinese businesses listed overseas and so available to international investors.

A common trading strategy is to anticipate changes to the composition of popular indices, knowing that funds that track an index or measure their performance against it may be forced to buy stocks scheduled for membership.

“It damages MSCI’s reputation — will people have to wait to see if they change their minds the next time they include something in the index?” said Mr McFadden. MSCI declined to comment further.

The index provider believes that the company’s actual free float is less than its minimum requirement of 15 per cent — due to shares being held by major pre-IPO investors, who cannot sell shares until next month.

The company’s shares are heavily concentrated in the hands of its top five shareholders, who collectively own 56 per cent of the company.

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