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HONG KONG: Hong Kong's benchmark Hang Seng Index lost 2.28 percent yesterday and shed 496.59 points to end at 21,264.99, after losing 408 points on Wednesday.

One of the biggest losers was Nine Dragons Paper Holdings, the largest paperboard producer in China, which tumbled sharply yesterday after the company raised $370 million from a share replacement to reduce its heavy debt.

The stock, which suspended trading on Wednesday, slid over 10 percent in pre-marketing trading and closed 11.5 percent lower yesterday to HK$10.78.

Market watchers are concerned about whether the top-up share replacement is enough to push the company's debt to a healthy level. Early this year, it was widely believed that the paperboard maker was facing looming bankruptcy as the mainland's exports decreased sharply amid the global recession, since most of the company's product was used to pack local goods for exports.

Nine Dragons' offering was upsized from a base deal of $350 million amid good investor response. About three-quarters of the proceeds will be used to reduce debt, according to the company.

The company's debt was $2 billion as of June 30 this year, which represents an alarming net gearing ratio of 83 percent, but a performance that is still better than the nearly 100 percent a year earlier.

The share issue "will definitely help but will not be enough to bring the debt to a healthy level," said Christian Jiang, an analyst at BoCom International.

Analysts foresee big margin potential in the country's leading paper producers, including Nine Dragons and Lee & Man, as supplies are expected to tighten in 2010 and 2011 following the closure of numerous small paper mills.

Despite yesterday's sharp decrease, the stock has rallied 387 percent so far this year, the recovery coming on the back of a sharp decline between September 2007 and December 2008, when the stock tumbled from a high of HK$26 to just over HK$2.

(HK Edition 10/30/2009 page3)