Pros and cons of jumping onto the HSBC bandwagon

HSBC, the cornerstone of Hong Kong's economy, needs you. Investors are being asked to rally around and whip up US$17.7 billion fighting fund the bank will use to hurricane-proof its balance sheet against fierce economic headwinds.

But should you give it the cash?

Investors have until March 11 to decide whether to join in the mammoth rights issue and buy five shares at HK$28 for every 12 they own.

If you own 40 lots of HSBC stock - worth HK$720,000 if the shares are trading at HK$45 - the cut-price shares will cost another HK$187,000. That is not exactly change you can find down the back of the sofa. The rights issue may be an enticing offer, but participating in it is also a serious investment.

'The rights issue is not the main point. If you do the rights issue, you have to put more money into HSBC,' said Ricky Tam Siu-hing, chairman of the Hong Kong Institute of Investors. 'The decision you have to make is whether HSBC is a good stock to invest in and what is its future.'

Right now, according to analysts, HSBC's share price is not that attractive because it is more expensive on valuation grounds than that of many other banks.

Do not focus on the HK$28 being dangled. When valuing shares just before a rights issue, investors must look at the price of the shares right now and the discounted, rights-issue price. The blended price is called the 'theoretical rights issue price', or terp for short.