Shares of Shanghai Industrial Holdings (SIH) dropped yesterday as the market reacted adversely to the purchase by SIH of two hotels from its parent company. The acquisition, in which the red chip paid $1.47 billion for the hotels, was seen as a move to bail out highly geared mainland parent Shanghai Industrial Investment (Holdings) Co (SIIC). SIH shares fell 85 cents, or 4.5 per cent, to $17.95. The negative sentiment spread to other red chips, with the Hang Seng red-chip index closing down 1.69 points to 1,067.97 points, against a 2.74 per cent rise in the Hang Seng Index. SIH chief executive Zhou Fumin denied the purchases were designed to help SIIC. He said: 'It is not in difficulties, so it does not need our help.' SIH will buy the South Pacific Hotel in Hong Kong for $880 million and take a 96.76 per cent stake in Shanghai SIIC South Pacific Hotel for $596.75 million. While the Hong Kong hotel was guaranteed to make a pre-tax profit next year and in 2000, the Shanghai inn would only begin operation in July 2000, Mr Zhou said. Countering criticism that SIH had paid over the odds, Mr Zhou said the Shanghai hotel would generate an internal rate of return of more than 20 per cent. Demand would increase after the Shanghai government put a moratorium on the building of high-grade hotels, he said. He said SIIC had sold the hotel to SIH at a discount of about $78 million, after accounting for investment and interest costs. A management agreement would be signed next month with an international management firm, which Mr Zhou said also intended to buy a 20 per cent stake in the Shanghai hotel from SIH at a price not below that paid to SIIC. For the Hong Kong hotel, Mr Zhou said, the company had focused on the potential for value appreciation because the property market was low. Mr Zhou said the hotel, which was sold at valuation, would provide lower profit this year than last because of a decrease in room rates. Paribas Asia Equity China head of research Jeannie Cheung Lai-ping described SIH's acquisition as 'disappointing'. 'We initially expected the acquisition to proceed later because the Shanghai hotel has no profit contribution this and next year. 'Even in 2000, the contribution is small,' she said. Ms Cheung said the acquisition would dilute SIH's earnings and return on equity (ROE). She marked down next year's profit forecast to $1.27 billion from $1.3 billion because the Hong Kong hotel's contribution could not compensate for the fall in interest income with less cash on hand after the purchase. She said ROE would fall to 11 per cent from 12 per cent. Mainland companies have suffered a credit squeeze since the collapse of Guangdong International Trust and Investment Corp, with foreign bankers wary of lending.