[Hong Kong ELS Trauma] ① Numerous ELS Melted by Hong Kong H Index Plunge

Editor's Note A total of 967 equity-linked securities (ELS) based on the Hong Kong H-Index have entered the principal loss (knock-in) zone. Individual investors, believing they could earn stable returns even in a bear market, hastily invested over 10 trillion won, but now find themselves unable to even recover their principal. Following the sharp declines in 2015 and 2020, the recent plunge of the Hong Kong H-Index is once again pushing investors to the brink. Will the nightmare of the past repeat itself? With high-intensity tightening by major countries, economic recession, and China's policy risks all converging, Hong Kong is now considered a riskier investment destination than the Chinese market. We urgently reviewed the investment status of domestic investors in the Hong Kong H-Index and examined the variables that could impact the index.

[Asia Economy Reporter Minji Lee] Office worker Mr. Lee (age 30) has made it a routine to check the HSCEI (Hong Kong H-Index) every morning after arriving at work. In April last year, he subscribed to an equity-linked securities (ELS) product linked to the Hong Kong H-Index at a bank upon recommendations from acquaintances. This was because he heard that friends who subscribed earlier had received messages indicating knock-in (principal loss). Although he was told that the knock-in condition was at 45% of the reference price, leaving some margin, he is anxious that the price might fall further. Mr. Lee said, "I think it was greed to expect a little more interest than savings or deposits," and added, "I just hope to get back at least the principal."

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The Hong Kong H-Index has plummeted more than 15% in just the past month, reigniting fears of knock-in losses in equity-linked securities (ELS). Concerns over economic recession and news of Chinese President Xi Jinping’s third term have pushed the index below the 5,000 mark for the first time in about 17 years. Although there has been a slight upward trend this month, given the unchanged external conditions, it is difficult to expect a sustained rise. [Related Article] 'Hong Kong ELS Trauma'

On the 6th, Asia Economy analyzed data from the Korea Securities Depository’s securities information system, SEIBRO, and found that from last year until the 4th of this month, a total of 967 publicly offered ELS with barriers based on the Hong Kong H-Index have entered the knock-in zone. The amount of investment that has entered the principal loss zone reaches 5.4562 trillion won. All of these knock-in ELS were heavily issued between January and October of last year. These were principal non-guaranteed products that notified investors that principal loss could occur if the Hong Kong H-Index fell 45-60% below the reference price on the issuance day.

As of the 31st of last month, the Hong Kong H-Index closed at 4,938.56, having dropped intraday to 4,919.03, falling below the 5,000 mark for the first time in about 17 years. The annual decline rate reached 39%. Even during the 2008 global financial crisis, the index did not fall below 6,000, but prolonged China-related risks accelerated foreign investor outflows (panic selling). Additionally, moves toward nationalization of platform companies, lack of willingness to support the Hong Kong stock market, and the near certainty of President Xi Jinping’s third term, which could exacerbate recession concerns, caused the index to plunge 15% just this month. Jinsoo Jung, a researcher at Hyundai Motor Securities, explained, "This year, short-selling transactions accounted for 23.4% of the total trading volume on the Hong Kong Exchange, but due to concerns over President Xi’s third term, the short-selling ratio in the Hong Kong stock market rose to 29.7% earlier this month."

As the index rapidly declined, the number of investors entering the loss zone increased exponentially. The ‘Kiwoom Securities 1715 (ELS)’ issued in November last year had its issuance price set at 8,966.77 due to the Hong Kong H-Index being lower than at the start of the year. Last week, it fell below the knock-in threshold (58% of the issuance price) at the 5,290 level, confirming principal loss. Even if the knock-in zone is touched, if the ELS meets the redemption conditions by maturity according to issuance terms, investors can receive their funds with the pre-agreed yield. However, for ELS that have now confirmed principal loss, the index must rise more than 30% to meet maturity redemption conditions. For example, assuming other underlying assets have not entered the knock-in zone, the Hong Kong H-Index must rise 34% to exceed 6,725 by the maturity date in 2024 for ‘Kiwoom Securities 1715’ to pay the agreed yield.

Among the knock-in products, some have slim chances of principal recovery. The ‘Samsung Securities 25689 (ELS)’ issued last February with a scale of 6.5 billion won requires the Hong Kong H-Index to exceed 9,373.93 for the final (5th, August 25 next year) early redemption condition, which means it must rise more than 70% from the current level. Even by the maturity date in February 2024, to fully recover the invested capital, the index must exceed 8,788.86, a rise of over 60% from now. Failure to meet this condition will make principal loss inevitable.