Buy, sell or hold? A step-by-step guide for HSBC shareholders

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Published: 12:00am, 8 Mar 2009

Retail investors have a few options in the HSBC rights issue. Because stockbrokers can take about two days to complete trades, investors should decide between these various courses of action by Wednesday. HSBC has set Friday, March 13, as the record date for rights entitlement.

Say you want to take up the rights issue but do not have the cash. Sell some of your existing HSBC shares in that case. According to Ricky Tam Siu-hing, the chairman of the Hong Kong Institute of Investors, 'tail swallowing' is the best approach for those who believe HSBC's fortunes will recover but do not have much ready cash to buy the discounted shares. Bear in mind that if you do not buy the discounted shares offered in a rights issue, your own shareholding will be diluted because there are more shares in issue.

'HSBC will have around 30 per cent more shares in issue after the fund-raising,' Mr Tam said. 'So if you let your rights lapse, you can lose out on dividend.'

Collins Stewart analyst Alex Potter forecasts HSBC will pay a dividend of 32 US cents a share for 2009. If you own 1,200 shares and buy the extra 500, you will receive a total dividend payment of US$544 for this year. If you do not buy the extra 500, you would receive US$384.

Now suppose you do not want to put more money into it. Selling your rights could be an option in that case.

Assuming you hold 400 HSBC shares, which at the time of writing were trading at about HK$45, giving a 'theoretical ex-rights price', or terp, of HK$40. If you hold 400 shares, they are currently worth HK$18,000. After the dilution, these 400 shares would be worth HK$16,000. So if you allow your rights to lapse, you have lost HK$2,000. To avoid this, buy (subscribe to) and then sell some rights.

The rights you are being offered have an intrinsic worth - the difference between the subscription price (HK$28) and the ex-rights price (HK$40). If the price of subscribing to the rights issue is HK$28 and the terp is HK$40, the rights are worth HK$12. So to take your HK$2,000 back, you should sell 166 rights soon.