Li & Fung is to be dropped from Hong Kong's Hang Seng Index from next month as the sourcing giant battles falling earnings and sales.

According to index compiler Hang Seng Indexes Company, Li & Fung will be replaced on the benchmark by mainland car maker Geely Automobile Holdings as a constituent stock.

The changes were decided upon after Hang Seng's quarterly review conducted at the end of December, and will come into effect from 6 March.

Louis Tse Ming-kwong, director of VC Brokerage, told the South China Morning Post that the changes made sense.

"Li & Fung's share price and business are not doing very well recently. It's no surprise for it to be removed from the benchmark index."

According to the publication, companies added to stock indices usually see a boost to their share price performance because Hong Kong's Exchange Traded Fund tracks index weightings and will add the new constituent stock to its portfolio and reduce holdings of those stocks removed from the index.

Li & Fung set out a new three-year strategy, which will take effect from this year, to speed up its supply chain as it revealed lower sales and earnings in its first-half.

Li & Fung eyes supply chain speed in 3-year plan

Hang Seng Indexes Company is looking to change the composition of the Index by gradually adding more red chips and privately-owned mainland companies to the index, in addition to the H shares, according to the South China Morning Post.

H shares are state-owned enterprises listed in Hong Kong, while red chips are companies incorporated in Hong Kong but with a mainland Chinese parent.