By Kinling Lo

June 5, 2017 - Hong Kong shares closed lower on Monday, as investors moved to the sidelines following sharp gains the prior week, while the coal sector advanced amid merger talks between two major Chinese energy giants.

Analysts also cited concerns over the latest round of terrorist attacks in London and uncertainties this may have on UK national elections scheduled for later this week.

The Hang Seng Index lost 0.24 percent to close at 25,862.99. The Hang Seng China Enterprises Index also fell, shedding 0.65 percent to 10,597.05.

Louis Tse Ming-kwong, managing director of VC Asset Management in Hong Kong, said the London terror attack during the weekend could have contributed to the drop, but added that the market is usually more volatile nearing the level of 26,000.

“The movement of the HSI is still within a tight range, it will not affect the bigger uptrend,” Tse said.

He said the market is currently undergoing “a short span of consolidation” given strong gains last week. Tse said he believes there is still potential for the HSI to reach 26,000 this week.

Among sectors, consumer electronics rose by 1.1 percent and coal stocks rose 0.38 percent.

China’s largest coal producer, China Shenhua Energy, and power producer Guodian Technology and Environment Group jumped on Monday following reports the companies are in merger talks.

Guodian’s shares rose by 17.17 percent, while Shenhua rose by 2.72 percent.

The gains came after their A-shares were suspended from trading on the mainland. The suspensions announced on Sunday sparked speculation of progress in energy reforms in China. In statements filed to mainland exchanges, the two companies made reference to a “significant matter” being planned, which sparked speculation of progress in energy reforms in China.

UBS head of Asian utilities research Simon Powell said the merger was aimed at addressing the problem of overcapacity in the industry.

“There is a significant amount of overcapacity in the thermal coal generation space,” he said. “Coal-fire generation is being squeezed by hydro. And a larger amount of nuclear is coming online.”

He warned that the market might be overly enthusiastic about potential additional value these mergers can bring to the companies involved.

Other top gainers on Monday include China Evergrande, the country’s second-largest but most-indebted property developer, which was up 11.34 percent to HK$15.90.

The Shanghai Composite Index lost 0.45 percent to 3,091.66 while the CSI 300 lost 0.51 percent to 3,468.75.

The Shenzhen Composite Index rose 0.69 percent to 1,800.93 while the Nasdaq style ChiNext was up 0.88 percent to 1,761.25.

“The major Chinese stocks have been popular for a while. The changes are quite flat and therefore this could be a result of buyers shifting their investments,” said Ben Kwong Man-bun, director of KGI Asia.

The mixed market reaction also came after the release of the May Caixin services purchasing managers’ index on Monday morning, which was 1.3 percent up from April, to 52.8. It was the first rise for the index, which covers both manufacturing and services, since last December.

“This reflects that the Chinese service industry is largely expected to grow positively in the near future,” Kwong said.