Hong Kong Shares Drop to Four-Month Low; HSBC Leads Decline

By Patrick Rial

March 3 (Bloomberg) -- Hong Kong stocks dropped, dragging the Hang Seng Index to the lowest level since October, after HSBC Holdings Plc announced plans to raise new capital through a rights offer.

HSBC, Europe’s largest bank by market value, plummeted 19 percent, as investments in subprime lending eroded profit. Financial stocks also declined after insurer American International Group Inc. reported a record loss for a U.S. company. Angang Steel Co., China’s second-largest steelmaker, jumped 8.4 percent ahead of the nation’s annual legislative meeting, where details of a stimulus package will be released.

“The earnings reports from HSBC and AIG yesterday are resurrecting fears about the stability of the financial system,” said Michiya Tomita, a Hong Kong-based fund manager of Chinese stocks at Mitsubishi UFJ Asset Management Co., which oversees $61 billion. “The government will outline proposals at the meeting this week, which paves the way for stimulus projects to begin.”

The Hang Seng Index slumped 224.97, or 1.8 percent, to 12,092.49 as of 2:52 p.m. local time, paring losses of as much as 3.8 percent. HSBC accounted for most of the decline, with the gauge headed for its lowest close since Oct. 27. The Hang Seng China Enterprise Index, which tracks so-called H-shares, rebounded from a 2.7 percent slide to add 0.8 percent to 6,634.10.

The benchmark Hang Seng Index has lost 16 percent this year, dragging its valuation to 9.8 times estimated earnings, down from 18.7 times at the beginning of 2008.

HSBC tumbled 19 percent to HK$46.40, the biggest decline since Black Monday in October 1987. The company plans to raise 12.5 billion pounds ($17.5 billion) by selling current investors five shares for every 12 they already own.

Hang Seng Bank

The bank said yesterday net income fell 70 percent last year to $5.73 billion, missing analysts’ estimates. It also slashed its dividend and said it will cut 6,100 jobs.

Hang Seng Bank Ltd., majority owned by HSBC Holdings Plc, lost 3.3 percent to HK$81.50 after Credit Suisse Group AG cut the stock to “neutral” from “outperform.” The bank announced yesterday that second-half profit dropped 46 percent to HK$5.04 billion ($650 million) because of lower fee income. BOC Hong Kong Holdings Ltd., the city’s largest bank, slid 4.1 percent to HK$7.29.

AIG yesterday reported a $61.7 billion quarterly loss, prompting the U.S. government to offer a package of equity, new credit and lower interest rates on existing loans.

Annual Meeting

Angang Steel jumped 8.4 percent to HK$6.84. Maanshan Iron & Steel Co., China’s fourth-largest steelmaker by value, rallied 7.4 percent to HK$2.31. Materials suppliers gained as investors sought companies expected to benefit from the government’s infrastructure spending.

China’s leaders are scheduled to provide details of economic stimulus plans at the annual meeting of the National People’s Congress in Beijing where they will also report on the outlook for 2009. The congress meets Thursday. Stephen Green, Shanghai-based head of China research at Standard Chartered, said China may double its 4 trillion yuan ($585 billion) proposed stimulus package at the meeting.

Pacific Basin Shipping Ltd., Hong Kong’s largest operator of commodity vessels, fell 8.4 percent to HK$3.17. Profit dropped 13 percent last year to $409.1 million, the shipping line said yesterday.

About two stocks rose for each that fell on the 42-member Hang Seng Index. March futures were little changed at 12,092.

The following stocks rose or fell. Stock symbols are in parentheses after company names.

Aluminum Corp. of China Ltd. (2600 HK) climbed 3.7 percent to HK$3.68. The publicly traded unit of the nation’s biggest producer of the metal was raised to “hold” from “sell” by Deutsche Bank AG’s Julian Zhu on the view that margins are likely to start improving, leading to better earnings in 2010.

Anhui Conch Cement Co. (914 HK) soared 6.6 percent to HK$34.10. China’s biggest cement producer was lifted to “buy” from “sell” at Deutsche Bank as demand for cement is set to rebound in the second quarter of this year amid rising government infrastructure spending.

Hutchison Telecommunications International Ltd. (2332 HK) added 1.5 percent to HK$2.05. The emerging-markets phone carrier controlled by billionaire Li Ka-shing was lifted to “overweight” from “equal weight” at Morgan Stanley on speculation moves to restructure the company will benefit shareholders.

To contact the reporter on this story: Patrick Rial in Tokyo at prial@bloomberg.net.