Leading Hong Kong shares fell for a third consecutive day on Wednesday led by subway operator MTR Corp, which dropped nearly five percent after the government ordered it to begin merger talks with the territory's light railway company.
Trade was relatively subdued as a number of initial public offerings sucked up funds. Investors are also waiting for the earnings season to begin in earnest when bellwether stock HSBC Holdings Ltd and its subsidiary Hang Seng Bank report on Monday.
The benchmark Hang Seng Index ended the day down 1.14 percent, or 156.94 points, at 13,599.47 points. The H-share index of Chinese firms listed here lost 1.64 percent to 4,900.88.
"The market was going up very fast so it (the consolidation) looks healthy," said Samantha Ho, fund manager at Manulife Funds Direct. "We could go higher if next week's results are good," she added.
But other market watchers said the Hang Seng could fall further after the expiry of the February futures contract on Thursday. The March contract is quoted 228 points lower than Wednesday's close.
Turnover was lighter than in recent sessions at HK $17.7 billion but more than Tuesday's HK $16.7 billion.
MTR Corp was the biggest blue chip loser, slipping 4.67 percent to HK $12.25 on resuming trade. The firm and commuter carrier Kowloon-Canton Railway Corp, both controlled by the government, should complete tie-up negotiations by the end of August, officials said on Tuesday.
Brokers said the impact of the proposed deal was uncertain as no terms were known.
But KGI Asia Securities said in a note that minority shareholders were unlikely to accept unfavourable terms and recommended picking up the counter when it falls to HK $12.
"The merger creates uncertainty and could lower MTRC's return on equity," said Kenny Tang, associate director at Tung Tai Securities.
Banks held up relatively well ahead of earnings and as the territory's lenders offered deposit accounts in the Chinese yuan currency for the first time.
HSBC was flat at HK $127 and Bank of East Asia lost 0.6 percent to HK $24.95.
Most other blue chips fell but investors picked up stocks that have lagged the market. Last year's worst Hang Seng performer, fixed-line phone firm PCCW Ltd, rose 0.85 percent to HK $5.95.
ASM Pacific Technology Ltd, a supplier of semiconductor assembly equipment, lost 4.27 percent to HK $35.90 despite a forecast-beating 88 percent jump in full-year net profit.
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