The 118 of constituent stocks on the Hang Seng Composite Small Cap Index (HSCSCI), some of which are mainland technology companies, are expected to be the market's new darlings after the launch of the Shenzhen-Hong Kong stock connect program, analysts say.

The rush for penny stocks with big ideas has already begun long before the program was being taken seriously by investors in Hong Kong and on the Chinese mainland.

The flood of cash into this previously neglected sector, which began stealthily late last year, is expected to turn into a torrent when capital flow is facilitated by the launch of the program expected in the third quarter of this year.

The small-cap index has surged by 38.5 percent, despite occasional faltering, since the beginning of the year to close at 3,027 on Tuesday.

Hong Kong-listed, small-cap stocks, especially those of Internet-related enterprises, are "set to ride a wild rally" when the Shenzhen-Hong Kong stocks cross-trading link starts, said Kevin Tam, deputy head of research at Core Pacific-Yamaichi International Hong Kong Ltd.

"Those companies with strong Internet and software businesses are sound investment because they have low valuation but high profitability," he said.

He recommended both Shenzhen-based Cogobuy Group, an e-commerce company, and PAX Global Technology Ltd, an e-payment terminals provider, for their respective global development strategies.

Kingdee International Software Group also looks a good buy, Tam said, as it has made inroads into the increasingly popular cloud services sector.

Cogobuy Group's share price has jumped 52.5 percent in the past six trading days to close at HK$14.06 on Tuesday, while PAX Global Technology and Kingdee International have advanced 30.3 percent and 53.5 percent, respectively, in a month.

Despite the price increases in the latest rally, many Hong Kong-listed, small-cap stocks are widely considered to be under-valuated, Tam said. "There's great upside potential in buying these stocks even at current prices."

Also of interest to local investors are the dual-listed stocks trading in Hong Kong at a significant discount to their Shenzhen counterparts, analysts said.

While many analysts expect the price gaps to narrow after the launch of the Shenzhen link, Tam said there's no guarantee that convergence is achieved by the increase in Hong Kong prices and not the decrease in Shenzhen prices.

Magdalene Miller, portfolio manager at Standard Life Investments, said investors should focus on companies that have produced credible development strategies rather than blindly following the crowd. There will be an increased flow of capital into the market after the program's launch, but the money will not be going to all shares.

"If you simply buy shares because of the policy changes, you will have something else which is more important than the Stock Connect program to consider," said Andrew Milligan, head of global strategy at Standard Life Investments. He said the Hong Kong stock market would be subject to greater influence by possible interest-rate hikes in the US.

David Cumming, global head of equities at Standard Life Investments, said it would be a dangerous game if an investor only bets his money purely on the expected level of liquidity in the market.

celia@chinadailyhk.com

(HK Edition 05/20/2015 page10)