As the year-end approaches, a review of non-HK Connect (non-Hong Kong Stock Connect) biotech companies' performance this year reveals that, beyond fundamental factors, these assets have generally faced substantial "liquidity discounts." This is because only Hong Kong accounts can trade non-Connect stocks, while HK Connect investors are excluded.

The impact is significant. On one hand, most mainland institutional funds—whether actively managed (such as mutual funds and many private funds) or passively managed ETFs (like the HK Connect Innovative Drug ETF (520880))—cannot invest in non-Connect stocks. On the other hand, southbound capital currently accounts for about 50% of Hong Kong's total trading volume, meaning non-Connect stocks inherently lack over half of their potential buyers. Combined with their typically smaller market caps, liquidity becomes even more constrained. This dual effect has driven many non-Connect biotech stocks below net cash levels, with valuations only recovering this year amid improved sentiment in the innovative drug sector.

Rejoining the HK Connect would substantially enhance liquidity, as it would open these assets to mainland institutional investors.

The primary barrier to HK Connect inclusion is the market-cap threshold, which requires a 12-month average market cap ranking in the top 94% of the Main Board. During the weaker market conditions of the past two years, this threshold stood at HKD 4–5 billion. However, with Hong Kong’s market rebound since last year, the bar has risen to HKD 8–9 billion. Companies aiming for re-inclusion generally expect the year-end threshold to settle between HKD 8.5–9.5 billion. For this analysis, we assume a higher threshold of HKD 9 billion.

**1. High-Probability Inclusion Candidates** - **IMMUNOTECH-B (06978)**: Year-to-date average market cap of HKD 9.22 billion, current cap of HKD 9.5 billion. Over the next 35 trading days, maintaining an average market cap of HKD 7.67 billion (i.e., no more than a 20% decline) would likely secure HK Connect re-entry by March 2026. The company recently updated ASH abstract data for its universal CAR-T platform, positioning it as a leader in allogeneic CAR-T development in China. - **Ascletis Pharma**: Year-to-date average market cap of HKD 9.23 billion, current cap of HKD 10.3 billion. A 26% or smaller average decline over the next 35 trading days would suffice. Recent multi-billion-dollar deals by Pfizer and Novo Nordisk for Metsera highlight strong MNC interest in ultra-long-acting GLP-1 therapies.

**2. Challenging but Possible** - **Harbour BioMed**: Year-to-date average market cap of HKD 8.2 billion, current cap of HKD 11.7 billion. A 17.95% average premium over the next 35 days is needed. The company’s recent R&D Day outlined ambitious 2028 targets, including ≥2 annual BD deals and ≥5 near-commercial products.

**3. 2026 Contenders** - **CStone Pharmaceuticals**: Year-to-date average market cap of HKD 7.97 billion, current cap of HKD 8.1 billion. A 91% average premium is required. Key data readouts for its PD-1/VEGF/CTLA-4 trispecific and ROR1-ADC are expected at ASCO 2026. - **Alphamab Oncology**: Year-to-date average market cap of HKD 7.86 billion, current cap of HKD 9.3 billion. A 71% premium is needed, but its current cap above HKD 9 billion positions it well for 2026 inclusion. The company leads in bispecific ADCs in China, with potential upside from overseas BD deals. - **Abbisko Therapeutics**: Year-to-date average market cap of HKD 7.28 billion, current cap of HKD 9.7 billion. A 100% premium is required, but its robust pipeline supports a 2026 push.

These three companies could achieve inclusion by September 2026 with concerted efforts.

**4. Longer Shots** - **Jacobio Pharmaceuticals**: Peaked at HKD 9.3 billion this year; current cap of HKD 5.4 billion. Strong pan-KRAS data at ASCO 2026 could revive its chances. - **Laekna Therapeutics**: Peaked at HKD 9.65 billion; current cap of HKD 4.7 billion. Delays in ActRIIA antibody BD deals have dampened sentiment; 2026 execution is critical. - **Qyuns Therapeutics**: Peaked at HKD 8.2 billion; current cap of HKD 4.4 billion. Despite a landmark autoimmune bispecific deal with Roche in October, shares fell 24%, reflecting sector headwinds.

**ETF Coverage** Four indices track HK Connect innovative drug stocks: 1. **Hang Seng HK Connect Innovative Drug Select Index**: 37 constituents (ex-CXO), semi-annual rebalancing. Tracked by 2 ETFs + 4 feeder funds (total AUM: RMB 2.89 billion). 2. **SZSE HK Connect Innovative Drug Index**: 29 constituents (ex-CXO), quarterly rebalancing. Tracked by 5 ETFs + 4 feeders (AUM: RMB 36.05 billion). 3. **CSI HK Connect Innovative Drug Index**: 37 constituents (incl. CXO), semi-annual rebalancing. Tracked by 3 ETFs + 12 feeders (AUM: RMB 6.11 billion). 4. **Hang Seng HK Connect Innovative Drug Index**: 31 constituents (ex-CXO), semi-annual rebalancing. Tracked by 1 ETF + 2 feeders (AUM: RMB 4.02 billion).

Total AUM across these indices: RMB 49.1 billion. None have hit their 50-stock limit, meaning newly included biotechs could attract passive ETF flows.

Since August, innovative drug stock-picking has grown challenging, reviving interest in ETFs. For non-Connect biotechs, post-inclusion ETF accessibility will hinge on index coverage speed and breadth. The Hang Seng HK Connect Innovative Drug Select Index offers the broadest coverage, including dual-listed firms like RemeGen and Junshi Bio.

**Risk Disclosure**: This analysis focuses on industry/company operations. Investment decisions should weigh multiple factors, including valuation and management. This is not investment advice.

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