To continuously educate investors on ETF fundamentals, China Merchants Securities has partnered with ten major fund companies and collaborated with Panorama Network to host the 2025 China Merchants Securities "Lucky Cup" ETF Live Trading Competition series. This initiative aims to help investors enhance their asset allocation and risk management capabilities while promoting healthy development of the ETF market.

On September 23, 2025, the "Lucky Cup" ETF Live Trading Competition series invited Wang Meng, Fund Manager of Index and Quantitative Investment Department at Bosera Fund, and Hong Luping, Chief Training Officer of Investor Relations Department at Bosera Fund, to discuss "Hong Kong Stock Investment Dual Perspective: AI + Innovative Drugs."

Wang Meng stated that the current Hong Kong stock market is in a relatively positive and upward state, with new quality productive forces represented by AI and innovative drugs receiving more valuation premiums in this market cycle. Specifically, in the AI sector, against the backdrop of slowing global liquidity, valuation pressure on technology stocks will be significantly relieved, while AI technology evolution and commercialization realization are core variables affecting this industry sector. AI is no longer just a money-burning story, but has become a new engine for many internet giants' performance. Focus should be placed on AI technology companies with real effectiveness and practical application scenarios.

Regarding innovative drugs, continued aging on the demand side and ongoing reforms on the policy and payment sides are expected to continuously support the development of the innovative drug sector. Meanwhile, overseas expansion of innovative drugs provides companies with long-term growth expectations, potentially further supporting stable and positive stock price performance. Due to the high knowledge barriers in innovative drugs, investors can engage in index investing through regular investment plans, clearly tracking market beta through index-based investing to capture return opportunities.

**01 Hong Kong Stock Market Overall State Positive and Upward, AI and Innovative Drugs Receive More Valuation Premiums**

Hong Luping: Since the beginning of this year, the Hong Kong stock market first welcomed a rebound, then experienced volatility, and market sentiment has been quite volatile recently, with many sectors rising and falling alternately. What do you think are the core driving factors behind the current market differentiation in Hong Kong stocks?

Wang Meng: The Hong Kong stock market is significantly influenced by macroeconomic and liquidity factors. Looking back at 2021-2023, with foreign capital outflows and US dollar interest rate hikes, the Hong Kong stock market was in a phase of volatility adjustment and valuation compression, with relatively low valuations. Starting from 2024, the Hong Kong stock market has warmed up, with commendable performance this year. This is partly due to already low valuations, and partly because the Federal Reserve's interest rate cut cycle has progressed steadily, global liquidity has gradually eased, US bond yields and the dollar have relatively weakened, and Hong Kong stock market valuations have recovered somewhat.

Domestically, southbound capital trading has been active, injecting certain support and funding sources into the Hong Kong stock market. Meanwhile, many investors have increased their risk appetite in this market cycle. From all perspectives, the Hong Kong stock market is in a relatively positive and upward state.

However, from industry and sector perspectives, Hong Kong stock market performance remains structural, with certain differentiation between different industries. For example, the recently highly-watched AI theme - AI technology innovation and empowerment have injected new vitality into Hong Kong's technology sector. Many internet giants continue to invest in R&D, building large models, establishing cloud infrastructure, and conducting digital infrastructure work, providing strong support for domestic AI technology development.

Another sector attracting investor attention is the innovative drug sector, which has doubled in gains this year in Hong Kong stocks. Such significant changes in the secondary market are mainly because domestic high-quality innovative drug R&D pipelines have received clinical data that many multinational pharmaceutical companies find attractive - this data is indeed outstanding enough. The first batch of overseas expansion events for Chinese innovative drug companies have frequently brought good news, also receiving substantial upfront payments, which has catalyzed market reactions.

In contrast, traditional industries in the Hong Kong stock market, such as financial and energy sectors, have performed relatively flat, leading to more structural market conditions in Hong Kong stocks with intensified differentiation in prosperity between different sectors. Overall, I believe that new quality productive forces represented by AI and innovative drugs have received more valuation premiums in this market cycle.

In July and August this year, many STAR Market and ChiNext sectors in A-shares performed well, with money-making effects attracting significant capital inflows, which may create some short-term siphoning effects on Hong Kong stock market funds. However, from a long-term perspective, looking at the full year, Hong Kong stocks' core investment themes remain clear and unchanged. We are in a phase of Chinese economic transformation and industrial upgrading, and capital markets will reprice these core targets. Essentially, we are still focusing on high-quality new quality productive force investment targets, which will receive more attention and valuation premiums.

**02 Long-term Net Inflow Trend of Southbound Capital into Hong Kong Stock Market Will Continue**

Hong Luping: Southbound capital has maintained net inflows into Hong Kong stocks for 27 consecutive months. Can this trend continue? What significance does this have for Hong Kong stock development?

Wang Meng: From a global perspective, the long-term trend of southbound capital net inflows into the Hong Kong stock market will continue, though the intensity and pace of inflows may fluctuate due to cyclical market environments. Hong Kong's technology and biomedical new economy sectors have long-term valuation advantages compared to similar A-share companies. As mentioned earlier, the Hong Kong stock market experienced volatility adjustment from 2021-2023, with relatively low valuations. Therefore, in many investors' eyes, Hong Kong stock investment targets are cheaper and more attractive.

For mainland investors, the Hong Kong stock market provides an opportunity to allocate high-quality Chinese assets at cheaper prices. Meanwhile, the Hong Kong stock market itself has uniqueness, possessing many unique targets scarce in the A-share market. For instance, internet giants are mostly listed in Hong Kong; many high-quality innovative drug companies are also concentrated in Hong Kong listings, as Hong Kong has Chapter 18A regulations encouraging non-profitable biomedical companies to list in Hong Kong.

The Hong Kong stock market environment brings together many high-quality internet, AI technology companies, and innovative drug companies, providing mainland investors with indispensable diversified allocation tools with more distinctive and diversified allocation targets - this is a major advantage of the Hong Kong stock market.

Meanwhile, when many investors research technology sectors, they may find related knowledge quite profound and difficult to understand. For individual investors, deep research poses certain challenges to their knowledge reserves. Among southbound capital, some are professional institutional investors with deep research backgrounds who actively participate in Hong Kong stock market trading and pricing, providing valuable liquidity support to the Hong Kong stock market. They actually play the role of cornerstone investors in the Hong Kong stock market's positive development process.

I believe that in the future, with continued southbound capital inflows and Hong Kong stock market repricing, southbound capital is expected to become value discoverers and long-term companions for China's new economy development, further strengthening market vitality in technology and innovative drug sectors.

**03 High-Quality A-Share Companies Listing in Hong Kong Further Strengthen Hong Kong Stock New Economy Characteristics**

Hong Luping: The Hong Kong stock market has certain scarcity relative to A-shares, and currently many A-share companies are concentrating on Hong Kong listings. How will this affect Hong Kong stock liquidity and traditional industry weight distribution?

Wang Meng: High-quality A-share companies listing in Hong Kong bring many positive changes to Hong Kong stock market prosperity and development. In terms of liquidity, the overall diversity and attractiveness of Hong Kong stock market listed companies have been significantly enhanced, attracting attention from international long-term capital and strengthening mainland investors' willingness to allocate Hong Kong stocks through southbound capital.

Meanwhile, new stock listings usually attract more investors to participate in trading. These new stocks often have high topic interest, attention, and trading enthusiasm in their initial listing period, which can further enhance market activity, forming a positive cycle of "liquidity recovery - valuation recovery - improved investment experience," helping boost Hong Kong stock liquidity.

Regarding traditional industry weight distribution, high-quality Chinese companies, particularly leading companies in new consumption, core manufacturing, and innovative drug sectors listing in Hong Kong, essentially significantly promote the proportion of Hong Kong stock new economy sectors, potentially forming cluster effects and attracting more upstream and downstream high-quality companies to list in Hong Kong, thereby revitalizing the entire capital market and further strengthening Hong Kong stock characteristics and advantages in new economy sectors.

**04 Global Liquidity Improvement Relieves Technology Stock Valuation Pressure**

Hong Luping: From a macroeconomic environment perspective, Hong Kong stock market is relatively sensitive to global monetary and financial liquidity as well as geopolitical factors. What impact do you think this round of Federal Reserve monetary policy adjustments will have on Hong Kong stocks?

Wang Meng: Federal Reserve monetary policy adjustments and global geopolitical changes indeed have significant impacts on Hong Kong stock market liquidity and core assets. With the Federal Reserve beginning its interest rate cutting cycle in August 2024, global liquidity is improving, funding costs are declining, and international capital may flow into Hong Kong stock market seeking higher returns.

From Hong Kong stock structure perspective, technology stocks often show higher volatility and elasticity. Against the backdrop of slowing global liquidity, technology stock valuation pressure will be significantly relieved, with AI and internet sectors potentially benefiting more.

For the innovative drug sector, innovative drug R&D requires substantial funding investment, making it relatively sensitive to international interest rates. During US inflation in 2022, the dollar entered a rate-hiking cycle, and under high interest rate environments, innovative drug development faced certain limitations in recent years, coupled with the pandemic period when global trade and exchanges were temporarily interrupted. However, in 2023-2024, especially in 2024 as the dollar entered a rate-cutting cycle, innovative drug development has shown recovery. Over these two years, many pharmaceutical companies have frequently brought good news, with numerous successful overseas expansion cases.

Meanwhile, dollar depreciation expectations and low interest rate environments also favor rising commodity prices, with some cyclical sectors potentially benefiting. Regarding geopolitics, if tense geopolitical conflicts ease, capital market risk appetite may improve, international capital will be more willing to allocate to emerging markets, and Hong Kong stocks, as an offshore market, will also benefit, especially some export-oriented industries such as certain consumer and manufacturing sectors that rely heavily on trade exports. When geopolitical situations ease, they may benefit; conversely, when geopolitical conflicts develop unfavorably, these industries may face certain impacts.

**05 Technology Sector Investment Logic Reshaping, Application Side Often Offers Broadest Opportunities**

Hong Luping: What specific investment opportunities has AI technology development brought to Hong Kong's technology sector?

Wang Meng: Actually, DeepSeek's popularity is a very important key event that has triggered many technological changes. The development of AI and other emerging technologies is profoundly reshaping the investment logic of the entire technology sector.

First is the hardware side. Artificial intelligence development cannot be separated from large model training and inference, and AI large model training and inference require strong computing power support, driving demand for high-end AI servers and GPUs. The Hong Kong stock market has globally leading AI infrastructure companies, including server manufacturers and chip manufacturing leaders, which are the first and most direct beneficiaries in the AI technology wave.

Meanwhile, training and deployment of many AI models cannot be separated from cloud platforms. Major cloud vendors need to continuously expand data centers and invest in high-speed networks and storage equipment, which will strengthen their output and construction capabilities.

Second is the software side. The core of AI is large models. Internet giants with strong R&D capabilities and data barriers are competing to develop large models, playing dual roles as both "computing power providers" and "model developers," occupying important positions in the AI wave.

Finally is the application side. The application layer is often the broadest opportunity area, most closely connected to consumers and enterprises. AI serves as a productivity tool empowering existing businesses and even catalyzing new business models. For example: internet platforms use AI to precisely optimize advertising placement, thereby reducing operational costs and improving monetization efficiency; smart electric vehicle sector relies on AI algorithms to enhance intelligent driving competitiveness - automotive companies with strong AI algorithms may occupy greater advantages in next-generation competition; healthcare sector uses AI to accelerate pharmaceutical R&D processes, improve R&D efficiency, save R&D costs, and even provide AI health management services. Some biotech companies and medical service companies are exploring these AI applications. Although currently in early stages, future application scenarios are very broad with significant development space.

**06 AI No Longer Just a Money-Burning Story, But Becomes New Engine for Corporate Performance**

Hong Luping: How has Hong Kong's AI sector performed overall this year? What industry distribution and investment logic do you think deserve attention in this sector?

Wang Meng: Taking the Hang Seng Tech Index as an example, this index has gained over 30% this year, performing relatively well. Especially since entering September, the Hong Kong stock market has been warming up. After consolidation in July and August, recent overall performance has shown strong momentum.

Under the resonance of global AI waves and local positive factors, Hong Kong's AI sector has performed well, with some leading AI companies' stock prices reaching new highs recently. Breakthrough in domestic large models is the core driving force behind market performance. In other words, market performance ultimately returns to technology and fundamentals.

At the beginning of this year, domestic large models like DeepSeek surpassed mainstream international products in multiple tests, greatly boosting secondary market confidence in domestic AI technology and strengthening our autonomous and controllable capabilities. AI is no longer just a money-burning story, but has become a new engine for many internet giants' performance.

We see that internet giants' cloud services and advertising businesses have achieved rapid revenue growth through AI empowerment, confirming AI's commercialization potential and driving valuation reconstruction for the entire sector.

According to the weight distribution of the CSI Hong Kong Artificial Intelligence Theme Index, AI is mainly concentrated in three major sectors: information technology, consumer discretionary, and communication services.

An important investment logic for Hong Kong's AI sector is value revaluation through AI empowerment. This empowerment is not innovation from nothing or 0-to-1, but existing mature industry giants considering how to use AI to achieve second growth leaps. These companies already have stable businesses and cash flows, and AI can help them reduce costs, deepen business moats, or expand new profitable businesses, thereby achieving asset and value revaluation.

Hong Luping: For Hong Kong AI companies, AI applications present two modes: platform-type and vertical scenario application-type. Under platform-type mode, many large models land in gaming, finance and other fields; while intelligent driving represents typical vertical scenario applications. Which mode do you think is more likely to form profitable closed loops in the next 1-2 years?

Wang Meng: These two modes each have their commercial logic and profit paths, making it difficult to generally say which mode is more likely to achieve profitable closed loops in the short term.

For platform-type, it focuses more on building general AI models that often manifest in application sides, empowering multiple industries and pursuing economies of scale and ecosystem effects. Technology development mainly concentrates on general large model R&D, algorithm iteration, and cloud service platform construction. Profit is mainly achieved through API call fees, cloud service subscriptions, or model licensing, which often have certain synergies with existing businesses like advertising.

Platform-type advantages include broad application scope, large potential market space, and easy synergy with existing businesses. However, disadvantages include large investments due to relatively large research volume and tasks, technology adaptation to specific scenarios often requiring additional adjustments, and intense competition.

Vertical application scenarios dive deep into specific industries, solving concrete problems and pain points, pursuing industry specialization and deep integration. This mode profits mainly through selling industry-specific software or hardware - specialized solutions - and pay-per-result models.

Vertical-type advantages include relatively clear and rigid industry demands, strong customer payment and purchase willingness, and easy formation of industry barriers. However, disadvantages include development limited by single industries, with prosperity often affected by the industry itself.

I personally believe both areas have their advantages. In vertical fields, the previously mentioned intelligent driving technology has been widely applied and is relatively mature, with faster commercialization realization capabilities - a good direction. Large internet platform companies have more advantages in AI infrastructure and models. They are not only "water sellers" but also "water users," playing dual roles. Their AI empowerment gains often involve internal structural adjustments within large platforms. These benefits may not be directly reflected in financial reports, but relying on large platforms, they often gain more advantages in empowerment. While surface gains may not be visible, they have actually improved production efficiency and facilitated operations through AI empowerment.

**07 Focus on AI Technology Companies with Real Effectiveness and Practical Application Scenarios**

Hong Luping: Since the beginning of this year, the Hang Seng Tech Index has gained over 30%. How do you view the matching between AI business growth and R&D investment among Hang Seng Tech Index constituents? What key factors will affect the Hang Seng Tech Index performance in the remaining time of the second half?

Wang Meng: Hang Seng Tech Index constituents mainly aggregate leading companies from various technology sub-sectors, facilitating investor investment. To maintain technological leadership and competitiveness, many listed technology companies maintain high-intensity R&D investment. Leading internet giants' R&D investment ratios usually reach over 5%, with some exceeding 10%, providing strong financial support for AI technology exploration and application.

These companies' R&D investment directions are highly synergistic with main businesses. AI can directly empower their core businesses and create new revenue. Their R&D investment often focuses on large models, advertising recommendations, cloud computing, intelligent driving and other areas that are easy to implement and can enhance their own business development. For example, improving game development efficiency, enhancing advertising placement precision, or optimizing e-commerce search platform efficiency. Therefore, these companies' AI business growth matches relatively highly with R&D investment, with higher short-term visible returns.

In contrast, some hardware companies have longer R&D investment conversion cycles. For example, R&D in AI chips, robots and other hard technology fields requires lengthy technological breakthroughs and validation cycles, unable to iterate and monetize quickly like software.

Regarding Hang Seng Tech Index performance in the second half, I believe there are two key factors. First is macroeconomic environment and liquidity - the core external variable. Federal Reserve monetary policy is an important factor affecting global technology stock valuations. Market expectations and pace regarding Federal Reserve rate cuts will directly affect the global liquidity environment.

Second is internal economic recovery conditions. Hang Seng Tech Index constituents mainly derive revenue from mainland Chinese companies. Therefore, domestic consumption, investment, real estate and other macroeconomic data recovery levels will also affect Hang Seng Tech Index performance. External monetary policy and internal economic recovery conditions jointly determine the Hang Seng Tech Index's future performance.

Meanwhile, the AI theme is an important phenomenal event catalyzing technology stock performance this year. AI technology evolution and commercialization realization are also core variables affecting this industry sector. Whether some phenomenal AI-native applications can emerge in the second half, truly stimulating C-end user payment willingness, will be an important catalyst for sector sentiment.

Investors can closely monitor the development of various companies' AI-related businesses, such as changes in revenue proportion and gross margins, to verify the authenticity of their AI stories. In summary, we should focus on AI technology companies with real effectiveness and practical application scenarios.

**08 Demand Side, Policy Side, Payment Side Long-term Support Innovative Drug Sector Development**

Hong Luping: This year's innovative drug select index has gained over 110%. What factors do you think have mainly driven Hong Kong stocks' pharmaceutical sector, especially innovative drugs, this year? Can these factors continue supporting future development of the innovative drug index?

Wang Meng: Driving factors mainly come from three sides: On the demand side, with societal population aging as a macro trend, people's demand for medical diagnosis and treatment is gradually increasing. 2024 data shows China's total population is about 1.4 billion, with elderly population over 65 about 220 million, accounting for 15.6%. Therefore, against the backdrop of population aging, medical expenses for elderly chronic diseases are very large, and disease spectrum has changed. In the last century, illnesses were mainly infectious diseases; in the 21st century, many affluent diseases appeared, such as hypertension, with needs for lipid reduction; now, many autoimmune diseases and cancer diagnosis and treatment needs are increasingly growing.

Taking tumors as an example, incidence rates are becoming younger. Annual new patients for tumors like lung cancer, colon cancer, and gastric cancer reach 4.5 million. Behind such large numbers is potential support for innovative drug treatment demand.

On the policy side, the state maintains a positive attitude toward innovative drug development, accelerating entire sector development. In July 2024, the state issued the "Pilot Work Plan for Optimizing Innovative Drug Clinical Trial Review and Approval," proposing to shorten innovative drug clinical trial application review and approval time limits from 60 working days to 30 working days.

In January this year, "Opinions on Comprehensively Deepening Drug and Medical Device Regulatory Reform to Promote High-Quality Development of the Pharmaceutical Industry" was released, mentioning shortening approval times for innovative drug and medical device clinical trials, optimizing drug and medical device registration inspection processes, and accelerating review and approval of drugs and medical devices for rare diseases. Essentially, this hopes these innovative drugs can enter usage stages more conveniently and quickly, helping people obtain better healthcare services.

On the payment side, in the past, many innovative drugs might not be available for purchase if they hadn't entered clinical stages or had just entered markets. But there's good news this year - the medical insurance bureau stated plans to release the first version of Category C catalog within 2025, serving as an effective supplement to medical insurance drug catalogs, helping drugs with high innovation levels and significant clinical value accelerate entry into hospitals, enabling people to obtain corresponding innovative drugs during medical consultations.

These factors are all long-term trends. Continued aging on the demand side, ongoing reforms on policy and payment sides are expected to continuously support innovative drug sector development, but attention should be paid to risks accumulated from rapid short-term rises in this sector.

**09 Innovative Drug Overseas Expansion Provides Long-term Growth Expectations, May Further Support Stable and Positive Stock Prices**

Hong Luping: In the past, domestic pharmaceutical companies were mainly "pure buyers" in equity sale businesses, but now innovative drug companies going overseas have become "sellers," achieving relatively high proportions globally in equity sale upfront payments. Many pharmaceutical companies have also received high upfront transaction amounts this year. What impact do you think this will have on companies' future valuations and stock prices?

Wang Meng: Actually, long-term demand for innovative drug medical sectors is upward, but innovative drug sector catalysis mainly began at the end of last year - more precisely, it has received more secondary market attention since this year. This is mainly because many innovative drug companies' pipeline overseas expansion, namely BD (License-out) events in 2024 and this year, let everyone see that after active R&D investment, returns can finally be seen, and recognition and support from international multinational pharmaceutical companies for our technology R&D results have been obtained.

According to Inside database, 2024 Chinese domestic innovative drug companies' authorized upfront payments and income totaled $5.7 billion, accounting for 20% of global cooperation authorization total upfront proportions, demonstrating Chinese innovative drug companies' asset value. Innovative drug companies' overall valuations have also undergone reconstruction this year.

This year, we've seen continued enthusiasm in overseas BD transactions for innovative drug companies, with multiple leading pharmaceutical companies' pipelines overseas authorized to multinational pharmaceutical companies, achieving good upfront payments. As these innovative drug companies' competitiveness continues improving, internationalization processes will accelerate.

Why do we sell so many high-quality innovative drug R&D pipelines to foreign countries? Why are foreign listed companies willing to buy? I believe this is a very important link in understanding innovative drugs' underlying investment logic.

First, when many Chinese R&D pipelines conduct clinical data, such as innovative drugs treating cancer, they focus on progression-free survival - average time when symptoms don't worsen or develop - and proportions of populations where patient tumors shrink to certain ratios and stabilize for certain periods. If a drug can increase the proportion of tumor shrinkage and stabilization from original 40% to 60%, many patients will firmly, confidently, and strongly desire to try such drugs that have greater possibilities of curing their diseases.

In innovative drug fields, if experimental data is good enough, even improving from 40% to 50% represents very important hope for patients. From their payment willingness and final market future space perspectives, there will be very significant changes.

In innovative drug R&D fields, good data is worth a price. As long as data is better than others, multinational pharmaceutical companies are willing to acquire corresponding pipelines. Why do we sell pipelines to these multinational pharmaceutical companies? Mainly because entire drug R&D processes are lengthy, with relatively large human and capital investments. Through cooperation with capable overseas pharmaceutical companies and industrial capital, we can reduce global R&D layout investments and alleviate our own capital pressure. Meanwhile, we can develop these pipelines together with partners, leveraging their knowledge accumulation and R&D technology to jointly accomplish these tasks.

Meanwhile, during drug listing processes, overseas markets may need local pharmaceutical company support to help them navigate regulatory approval paths. Through this cooperation model, it's better for drugs to finally form market entry, representing a win-win process.

Regarding stock prices, news of leading pharmaceutical companies' pipeline overseas authorizations achieving high upfront payments becomes important catalysts for stock prices, enhancing investor confidence. Meanwhile, overseas cooperation not only brings short-term upfront payment income but also hopes to obtain sales profit sharing after future drug listings, providing companies with long-term growth expectations and potentially further supporting stable and positive stock price performance.

Comprehensively speaking, entire innovative drug companies' future growth space remains very large.

**10 Current Innovative Drug Valuations Relatively High, Continue Monitoring Pharmaceutical Company Fundamental Data**

Hong Luping: For investors, how should they track innovative drug companies' future R&D processes and commercialization processes? What risks might exist in valuation judgment processes?

Wang Meng: Innovative drug sector research difficulty is relatively high, with strong knowledge barriers. If everyone wants to understand innovative drugs or pharmaceutical sectors, they can use some professional channels, such as pharmaceutical-specific information channels like PharmaCube or Inside. However, innovative drug sector research may require much pharmaceutical professional knowledge.

When reading related research reports or materials, everyone may encounter some professional terms. For example, frequently seen "randomized double-blind" experiments, and when evaluating drug effectiveness for treating tumor patients, terms like progression-free survival, objective response rate, or disease control rate are used. Behind these terms may be much English that appears difficult to understand.

I think for individual investors, summarizing analysts' research reports or viewpoints, understanding conclusions behind so much information and knowledge through their condensation and summarization, might be more achievable approaches.

Meanwhile, we notice this year's innovative drug sector gains have been very large, with very high investor attention. We remind investors here that current innovative drug valuations have experienced reconstruction and are in relatively high positions. How future trends develop, we need to look step by step at future fundamental data.

For example, we need to see how future innovative drug companies' overseas authorizations or transactions develop, whether there are latest developments; how different pharmaceutical companies' pipeline clinical effects perform. If clinical effects exceed expectations or show good clinical performance, this might positively affect these listed companies or entire sectors. However, if news mentions certain pipeline R&D lacking confidence, unsatisfactory clinical data, or R&D failures, this might represent significant setbacks for these companies.

Therefore, innovative drug R&D cycles are long, investments large, and full of uncertainties. In future investment processes, everyone still needs to continuously monitor these fundamental data to help make judgments, because our innovative drug valuations inherently include expectations for many future changes. If fundamentals experience unfavorable factors affecting market expectations, corresponding sector performance might experience adjustment rounds.

**11 Focus on Hang Seng Hong Kong Stock Connect Innovative Drug Select Index, Currently Can Use Regular Investment to Control Risks**

Hong Luping: From the entire innovative drug industry perspective, have all companies entered profitable stages? For ordinary investors, what suitable index tools are available for reference?

Wang Meng: Actually, many innovative drug companies are currently still non-profitable companies that have invested substantial funds in early R&D and haven't entered harvest periods. Therefore, when valuing innovative drug companies, we usually don't use price-to-earnings ratios (PE) but more often use price-to-sales ratios (PS).

This year we've also noticed many fundamental signals, such as some pharmaceutical companies obtaining upfront payments through signing large authorization orders. Some listed companies have achieved income-expenditure balance and turned losses into profits through cost control and overseas income - this is a very important landmark event.

I believe that as more innovative drugs enter harvest periods in the future, like trees growing larger with more and more mature fruits, there will always be harvesting days, and these listed companies may turn losses into profits.

From investment perspectives, different innovative drug companies may target different disease types. For example, everyone treats cancer through immunotherapy methods, but targets may differ, and large molecules used may differ. Many investors encounter many medical professional terms and vocabulary when understanding individual listed companies' operating conditions, with much Chinese-English mixing that people find difficult to understand and integrate.

Therefore, I believe indices are very convenient tools for investing in corresponding targets: First, index rates are relatively low; meanwhile, index holdings are relatively transparent, allowing investors to clearly know what they've bought and tracked, creating stronger investment trust; additionally, if everyone has particularly focused sectors, index-based investing can clearly track market beta and capture return opportunities.

The Hang Seng Hong Kong Stock Connect Innovative Drug Select Index is a good target for investing in Hong Kong stock innovative drug sectors. This index was launched on July 17, 2023, aiming to reflect performance of Hong Kong-listed companies highly related to innovative drug research, development, and production that trade through Hong Kong Stock Connect.

The index selects from Hang Seng Index constituents meeting Hong Kong Stock Connect trading qualifications, choosing pharmaceutical and biotechnology companies while eliminating stocks with low correlations to innovative drug and biopharmaceutical themes. Meanwhile, by screening companies with high R&D investment and high liquidity, investment value is strengthened.

Specifically, in compilation methodology, the Hang Seng Hong Kong Stock Connect Innovative Drug Select Index selects qualified constituent stocks of the Hang Seng Composite Index trading under mutual connectivity as sample space. For liquidity, it requires past 12-month average daily turnover of no less than HK$10 million.

Regarding industries, index constituent stocks belong to pharmaceutical or biotechnology sub-industries, calculating business correlation rankings with innovative drug and biopharmaceutical themes while eliminating companies with low correlations. In selection methodology, the index takes the top 50 securities by market capitalization as index constituents; if qualified candidate securities are fewer than 50, all are included.

For weighting, free-float market capitalization weighting is generally adopted, with individual constituent stock weight caps at 15% and top 5 constituent stocks' combined weight caps not exceeding 60%.

Hong Luping: This year's innovative drug sector gains have been substantial. If entering now, what strategy do you think should be adopted to better control investment risks?

Wang Meng: I believe that regardless of when investing, everyone should combine their risk tolerance and act within their means. Second, when building positions during investment, everyone often faces difficulties regarding how to avoid buying at peaks and how to control buying costs.

If you're optimistic about this sector long-term and want to buy, I think you can use regular investment approaches when building positions, engaging in diversified investing. Through diversified regular investing, you can spread buying time points, with final buying costs actually being average prices of these time points. While this may not guarantee buying at lows, it can avoid buying at peaks, helping control buying costs and providing better investment experiences.