HSBC which reported flat annual pre-tax profit in 2015, is betting that the Pearl River Delta region in southern China is succeeding in rapidly upgrading its economy from low-value manufacturing to high-growth industries, creating big opportunities to provide banking services.

But overall negative sentiment toward China has meant its shares, have dropped 26 percent over the past year.

In the run up to its annual shareholder meeting in London on Friday, HSBC took analysts and investors on a three-day tour of the Pearl River Delta, an area with 60 million people just across the border from Hong Kong. It's UK-based board went on a similar tour of the region last year, according to people familiar with the situation.

HSBC, which is the largest bank in Hong Kong and currently has 65 bank outlets in Guangdong province, which includes the Pearl River Delta, is hoping to produce $1 billion a year in pre-tax-profit from the area. But some investors are doubtful given the economic slowdown in China and a spike in Chinese bad bank debt.

HSBC's growth plan envisages adding 4,000 employees to the Pearl River Delta area over the next three-to-five years, and it also plans to redeploy capital from other regions into Asia, though it is unclear how much of that will target southern China. It currently has around 1,500 bank employees and 13,000 IT and support staff in the Pearl River Delta.

Citi analyst Andrew Coombs, who was on the trip, says HSBC is looking to grow its branch network in the region to 100 outlets, but HSBC will not comment on that.

"The bank’s Pearl River Delta strategy is perfectly sensible," said Ian Gordon, who heads bank research at Investec bank and was on the trip. "However it will likely be three-plus years before we see any meaningful incremental contribution. It does nothing to soften the impact of near-term headwinds."

Last year, HSBC made 83.5 percent of its unadjusted pre-tax profits in Asia and 52 percent in Hong Kong alone. Its mainland China banking profits, excluding associates, stood at $1.05 billion.

FROM OLD TO NEW

The Pearl River Delta, which has played a crucial role in China's opening up to the world since the late 1970s, accounts for one quarter of the nation's trade and has been known as the 'workshop of the world' for its production and export of massive amounts of garments, electronics and other products.

The region, particularly around the city of Shenzhen, is now turning into a hub for innovation and technology, as well as developing a services sector that includes law, design and accounting. Its $1.1 trillion in annual gross domestic product is already bigger than Indonesia's.

During the road show, participants were introduced to local HSBC clients such as appliances maker Medea and telecoms giant Huawei, according to the trip's agenda.

Other HSBC customers in the region include DJI, a Shenzhen-based manufacturer that supplies three quarters of the global market for commercial drones thanks to its Phantom model.

"The Pearl River Delta is a natural area for (HSBC) to be operating in," said Joost de Graaf at Amsterdam-based Kempen Capital Management, which owns shares in HSBC. "But the issue that the majority of investors will have is that (China) is not a transparent market, and the lack of bankruptcy law or formal procedure to repossess assets when clients default, makes it hard for people to truly judge the health of the financial system."

Citi, which rates HSBC as its top pick among UK banks, says HSBC currently only makes $100 million in the Pearl River Delta. HSBC is the biggest foreign player in China, where collective market share by foreign banks remain below 2 percent.

DIVIDEND

To retain investors and attract funds that focus on dividend-paying stocks, HSBC distributed about $10 billion of its 2015 profit in dividends, offering a chunky 8 percent yield, one of the highest in the global banking world. Gulliver told Hong Kong shareholders at the bank's informal annual meeting on Monday that the bank is also studying the possibility of a buy back of its shares, which are now trading below book value.

"My major concern, as I am sure it is to other investors, would be whether they are able to maintain their dividend policy and balance sheet ratios during the Asian Pivot," said Tony Jordan at EFG Asset Management (UK), which owns HSBC shares.

A securities joint venture due to be launched in China, which HSBC will majority own, will give it the chance to offer services ranging from investment banking and domestic securities trading, where it faces stiff competition from local lenders.

For some Asian-based investors with a long-term view, HSBC's focus on China is precisely the reason to invest in the bank.

"We re-entered HSBC with our Asian funds four years ago on the basis of its return to its Asian roots," said Hugh Young, managing director at Aberdeen Asset Management Asia.

"The China strategy is important. But for many of the investors, who don't look at it that closely, it may be too esoteric."

(Additional reporting by Rachel Armstrong in London; Editing by Martin Howell)

By Lisa Jucca and Sinead Cruise