HONG KONG: Air China shares tumbled nearly 10 percent in early trading yesterday as investors feared the mainland's biggest airline may have paid too much and taken on too much debt in raising its stake in Hong Kong carrier Cathay Pacific.

Shares in CITIC Pacific, which sold a 12.5 per cent stake in Cathay to Air China for HK$6.34 billion, also slumped more than 9 percent in the early trading.

Analysts said investors were worried about the likely debt that loss-making Air China might have to take on as part of the deal, and that it may have overpaid for the stake.

Losses in the two companies narrowed yesterday afternoon as the benchmark Hang Seng Index clawed back to end 0.84 percent higher at 20,306.27 points.

"The offer price was 1.3 times Cathay's book value last year, which is higher than our official 1-year price target of HK$9.69 per share," said Jay Ryu, head of regional transport research at Mirae Asset. "Perhaps Air China was looking at Cathay's valuation for a longer term."

The deal could help Cathay improve its ties with Air China and boost its share of the mainland travel market, analysts said.

"It could have a better foothold in China without paying an extra cost," Ryu said.

Investors, however, dumped CITIC Pacific shares over concerns about the loss of profit contributions from Cathay, one of Asia's stronger airlines.

Goldman Sachs raised CITIC Pacific's estimated per-share earnings for this year by 35 percent to factor in the disposal gain, but cut its next year estimates by 5 percent and 2011 by 11 percent to account for the lack of profit contribution from Cathay.

CITIC Pacific said it would get a HK$1 billion gain in the second half from the sale, which was announced on Monday.

Air China ended yesterday 1.97 percent lower at HK$4.48; CITIC Pacific shed 1.31 percent to $22.55.

China Daily - Agencies

(HK Edition 08/19/2009 page4)