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China, HK stocks dip as banks drop before Q3 results

Published 10/26/2010, 04:50 AM
Updated 10/26/2010, 04:56 AM

* Hang Seng Index eases as banks offset gains in energy

* Weak financials drag Shanghai lower; earnings eyed

* BYD slumps 10.3 pct as rivals gain market share

* Chalco slips 4.3 percent in HK after Q3 loss disappoints (Updates to close)

By Vikram S. Subhedar and Farah Master

HONG KONG/SHANGHAI, Oct 26 (Reuters) - Shares in Hong Kong and Shanghai slipped on Tuesday as banks fell ahead of earnings reports, offsetting gains in refiners after Beijing raised fuel prices.

The Hang Seng Index <.HSI> fell 0.1 percent to 23,601 points, with Aluminum Corp of China (Chalco) <2600.HK>, the top loser, down 4.3 percent after disappointing results.

China's key stock index <.SSEC> slipped 0.3 percent to 3,041 but held above the psychological 3,000 level, which it broke through on Monday's 2.6 percent.

"For the broader market, the very fast break through the 3,000-point mark means some consolidation needs to happen," said Xingyu Chen, analyst at Phillip Securities in Shanghai, adding that the focus now was on earnings from major banks later this week.

Agricultural Bank of China Ltd <601288.SS> was down 2.5 percent, while Industrial and Commercial Bank of China Ltd <601398.SS> fell 1.8 percent. Bank of China <601988.SS>, which reports on Wednesday, dropped 1.4 percent.

Robust loan growth and attractive valuations have tempted investors to make bets on banks that have underperformed the broader market for most the year, but investors prefered to lock in some recent profits before the quarterly numbers.

China's biggest state lenders are expected to report a 23 percent rise in combined third-quarter profit, a median estimate of five analysts surveyed by Reuters showed. [ID:nTOE69L0A3]

"Loan demand isn't languishing and sour debts haven't piled up," said Wu Songkai, analyst at Huatai United Securities Co. "With policy risks now fading, banking stocks suddenly look very attractive."

The rally in banking shares has helped the Shanghai market jump 14.5 percent so far this month, despite an unexpected rise in China's interest rates last week, cutting its losses for the year to 8 percent compared with 19 percent at the end of September.

ENERGY SHARES LIMIT HK LOSSES

In Hong Kong, gains in refiners helping to offset declines in financials.

Oil majors rose after China lifted retail fuel prices by about 3 percent, the first increase in seven months. The move will help refiners' profit margins [ID:nTOE69O07C]

China Petroleum & Chemical Corp (Sinopec) <0386.HK> rose 3.1 percent and Petrochina Co Ltd <0857.HK> firmed 0.9 percent, providing the biggest boost to the Hang Seng Index.

The Hang Seng has gained 5.5 percent this month, underperforming its Shanghai counterpart, a trend that some market players expect will continue over the next quarter.

"Hong Kong already had a good run. China had been lagging and has rebounded just last week so most of the stocks are still very attractively priced. We feel very comfortable to stay overweight on China for the rest of the year," said Grace Tam, a vice president, investment services at JPMorgan Asset Management.

The Hang Seng is trading at a forward 12-month price-to-earnings multiple of 12.7, the highest since April this year, according to Thomson Reuters data.

One blue-chip stock that saw a sharp sell-off was aluminum producer Chalco.

Chalco, whose shares had gained over 27 percent before Tuesday's decline, reported a third-quarter loss on a supply glut and weak margins. [ID:nTOE69L07F]

Although the company said it was optimistic about its outlook, some analysts were unimpressed, citing concern over the company's fundamentals.

JPMorgan Chase metals analyst Nathan Zibilich downgraded the stock to "underweight" from "neutral" and said in a note to clients that the market's exuberance after Chalco's rare earth investment on Sept. 28 was a bit irrational.

"With a net debt-to-equity ratio of 104 percent at quarter-end and projected negative free cash flow of 1.8 billion yuan this year, we believe the risk of equity holders being diluted through capital raises is high," said Zibilich.

Shares of BYD Co Ltd <1211.HK>, the Chinese carmaker backed by U.S. billionaire Warren Buffett, slumped 10.3 percent after it posted a 99 percent drop in third-quarter earnings as it lost market share to rivals. [ID:nTOE69L051] ($1=6.66 Yuan) (Editing by Kim Coghill)

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